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Sahney Steels and Press Works Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1984)10ITD659(Hyd.)
AppellantSahney Steels and Press Works Ltd.
Respondentincome-tax Officer
Excerpt:
1. these three appeals are preferred by the assessee and they relate to the assessment years 1969-70, 1970-71 and 1971-72. for the sake of convenience, the appeals are considered together and are disposed of by this order since common contentions are involved.2. the assessee is a company. the accounting period is the calendar year preceding the relevant assessment year. in each of the appeals the assessee contests the finding of the commissioner (appeals) upholding the validity of proceedings taken under section 147(a) of the income-tax act, 1961 ('the act'). the assessee entered into an agreement with wood auto suppliers ltd. of the united kingdom (english company) dated 5-7-1962. the english company were manufacturers of armatures, field coils, etc., which were being sold by them in.....
Judgment:
1. These three appeals are preferred by the assessee and they relate to the assessment years 1969-70, 1970-71 and 1971-72. For the sake of convenience, the appeals are considered together and are disposed of by this order since common contentions are involved.

2. The assessee is a company. The accounting period is the calendar year preceding the relevant assessment year. In each of the appeals the assessee contests the finding of the Commissioner (Appeals) upholding the validity of proceedings taken under Section 147(a) of the Income-tax Act, 1961 ('the Act'). The assessee entered into an agreement with Wood Auto Suppliers Ltd. of the United Kingdom (English Company) dated 5-7-1962. The English Company were manufacturers of armatures, field coils, etc., which were being sold by them in India under the name of Wood Auto. The assessee had acted as agents of the English Company in the past as seen from the agreement. The assessee sought to have the benefit of technical assistance from the English Company and the English Company agreed that they would not export to India articles referred to therein under the trade name of Wood Auto.

In terms of the agreement the assessee was to pay to the English Company commission for the term of the agreement in consideration of their providing technical assistance to the assessee relating to the manufacture of the articles mentioned above and also in consideration of their assisting the assessee in their promotion of selling activities. There were various other clauses in the agreement. Suffice it to say that commission or royalty was payable at the rate of 3 1/2 per cent of the sale price of the articles mentioned, computed and certified in the manner specified under Clause 2 of the agreement. The agreement in terms of Clause 8 was to remain in force for a period of 7 years from first sale of specified articles. The clause also provided for the agreement being terminated on the happening of certain contingencies. There was also a provision that the agreement could be terminated by giving three months' notice in writing to the assessee, if the English Company was not satisfied with the articles supplied or they did not measure up with the standard. There was also a clause (Clause 14) which stated that the agreement should be construed in all respects in accordance with English law and the parties submitted themselves in terms of this clause to the jurisdiction of the English Courts. On behalf of the English Company the agreement was signed by one Reginald Wood, director and on behalf of the assessee the agreement was signed by Trilochan Singh, director. Purportly in terms of such agreement the assessee had claimed and was also allowed, in the original assessments for the assessment years now under consideration as a deduction, royalty which was claimed as payable. In terms of the agreement the only actual payment of royalty made to the English Company by the assessee was Rs. 10,729 during the period February 1964 to November 1964. According to the assessee, the amounts of royalty payable, which were claimed as deduction in the assessment years commencing from 1965-66 (excluding the solitary amount of actual payment already referred to), were as under :Assessment year Amount of royalty claimed Rs.1965-66 2,5631966-67 33,9691967-68 53,9431968-69 69,5921969-70 74,8611970-71 74,0601971-72 85,2881972-73 10,313 Thus, in the assessment years now under appeal, i.e., 1969-70, 1970-71 and 1971-72, in the assessments as originally made amounts of Rs. 74,861, Rs. 74,060 and Rs. 85,288 which stood as debits in the profit and loss account were allowed as deductions. In course of time there was certain correspondence between the ITO on the one hand and the English Company on the other and based on the information contained in the letters of the English Company the ITO considered that the provisions of Section 147(a) were attracted. Accordingly, reasons were recorded before initiating such action and specimen of the reasons recorded which were in similar terms for each of the assessment years has been set out in the common order of the Commissioner (Appeals) and is as under : By virtue of an agreement dated 5-7-1962 entered into by the assessee-com-pany with M/s Wood Auto Suppliers Ltd., England, for purposes of obtaining technical know-how, the assessee has agreed to pay royalty at three and a half per cent of the sales of armatures and field coils. The agreement was operative for 7 years from 12-2-1964 to 12-2-1971. Even though the assessee has been year after year debiting the profit and loss account with the royalty payable to the foreign collaborator, the assessee has not remitted the sums to the non-resident. The opening credit balance in the account of M/s Wood Auto Suppliers Ltd., England, in the previous year relevant to the assessment year 1969-70 is Rs. 1,60,067 and the amount debited to the profit and loss account of the year is Rs. 74,861 towards the said royalty payable. On enquiry with the non-resident company it has been ascertained that the agreement was terminated by issue of a letter dated 6-8-1968 by the non-resident company and that both the parties have agreed to the effect that there would be no claim from either party regarding the payment of royalty. The assessee has not brought to the department's notice about the termination of the agreement or about the cessation of the liability. Therefore, the deduction of the sum of Rs. 74,861 from the income of the year was wrong and the sum of Rs. 1,60,067 was omitted to be included in the total income of the year under Section 41(1). I have reason to believe that, by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the company's assessment for the assessment year 1969-70, income chargeable to tax has escaped assessment for the assessment year 1969-70. I request the sanction of the Commissioner for issue of a notice under Section 148 for the assessment year 1969-70.

After obtaining the approval of the Commissioner, notice under Section 147(a) was issued. Such notice for each of the assessment years under appeal was duly served on 20-3-1978. It may be mentioned at this stage that for the assessment year 1972-73, the ITO had disallowed the claim for royalty pertaining to that year and he had also added back by invoking the provisions of Section 41(1) of the Act, an amount of Rs. 3,94,276 representing accumulated royalty for earlier years. These additions were subject of context before the AAC and later before the Tribunal. The Tribunal passed its appellate order for the assessment year 1972-73 in IT Appeal No. 1506 (Hyd.) of 1975-76, dated 31-8-1977.

The relevant extract from this appellate order of the Tribunal is as under : The assessee entered into an agreement with M/s Wood Auto Suppliers Ltd. of United Kingdom on 5-7-1962 according to which, the foreign company was to provide the assessee technical information in regard to manufacture of armatures and field coils and to assist it in promotion of sales. The foreign company was also to give technical information to the assessee as to the type of plant and machinery that was required to be set up for the manufacture and technical data to be supplied and the assessee was also to be given tools and inspection gauges. In return for the above services, the assessee was to pay the foreign company royalty at three and a half per cent on sales of armatures and field coils manufactured by it, for the purpose of which, the sales should be certified half-yearly on 14th May and 14th November by a firm of chartered accountants. The agreement was to be in force for a period of seven years and it could be terminated by three months' notice given in writing. On the basis of this agreement, the assessee had been claiming some amounts of royalty payable to the foreign company every year by debiting the profit and loss account and the amounts so claimed were allowed in the relevant assessment years, up to 1971-72. For the assessment year 1972-73, the assessee claimed a sum of Rs. 10,313 on similar basis. During the course of the assessment proceedings, the ITO found that the assessee, though debited the royalty payable to the foreign company every year in all the past years, nothing was remitted except for a sum of Rs. 10,729 during the period February 1964 to November 1964 of which tax deduction of Rs. 5,365 was made.

On writing to the foreign company the ITO came to know that the agreement for the payment of royalty was terminated as early as 6-8-1968 and this was evidenced by a letter sent by the Company to the New Indo Trading Company in which one of the directors of the assessee-company was interested. This letter read as follows : 'In consequence of your visit to our office during July it is confirmed that the above mentioned agreement signed on 5-7-1962, between Wood Auto Supplies Ltd. and Sahney Steel & Press Works Ltd. be considered terminated. This relieves you of any payment for royalties. It also means that under no circumstances are you to use the name 'Wood Auto' either in advertisements, copy or on cartons, or in any other way to connect 'Wood Auto' with 'Auto Sahn products'.

The assessee wrote on 20-11-1968 confirming the termination of the agreement. As a result of the termination the royalty debited to profit and loss account and credited to the foreign company's account in the earlier years was certainly not payable to the said company, but the assessee, instead of writing off the liability in the foreign company's account in the accounting year 1968, wrote it off in 1974 by crediting the profit and loss account.

It was contended before the ITO that since the period of agreement was seven years which ended on 15-2-1971 and during which the foreign company could always claim the royalty payable to it, the assessee waited for another three years to cover the period of limitation before writing off the liability in the books. The ITO was not satisfied with the explanation. He held that the agreement ended in the accounting year relevant for this assessment year and since the liability to pay royalty was completely remitted by the foreign company and the liability was allowed as a deduction in the earlier assessments, the entire sum of Rs. 3,94,276 representing accumulated liability for royalties in the earlier years, should be treated as income to the assessee under Section 41(1) of the Act for this assessent. He, accordingly, added back Rs. 3,94,276.

In appeal, the Appellate Assistant Commissioner held that since the agreement was terminated as far back as August 1968, the liability ceased in that year itself. If the liability for royalty credited to the foreign company's account was to be added back in the assessment under Section 41 of the Act, it should be done for the assessment year 1969-70 and not for the present assessment year. He has also observed that the ITO has himself reopened the assessment for 1970-71 and added the royalty payable for that year as per the assessee's claim. He; accordingly, deleted the addition in question from the assessment.

Before us, the departmental representative has relied on the observations of the ITO while for the assessee, reliance has been placed on the order of the Appellate Assistant Commissioner.

In our opinion, the Appellate Assistant Commissioner was correct in the view he has taken. It is clear from the correspondence placed before us to which reference was made by the Appellate Assistant Commissioner, that by mutual consent the agreement of 1962 between the foreign company and the assessee was terminated in August 1968, releasing the assessee-company from the obligation to pay royalty.

In fact, except for a sum of Rs. 10,729, the assessee did not pay any royalty to the foreign company on the basis of the agreement in earlier years though a claim was made and allowed as deduction for royalty payable on the basis of the agreement. When once the agreement was terminated in 1968 there was no point in the assessee contending that the agreement was for a period of seven years which ended in 1971 during which the foreign company could always demand the payment. The cessation of liability referred to in Section 41(1) of the Income-tax Act, 1961, took place in 1968 itself. Therefore, the royalty payable for that year and earlier years and claimed as deduction by the assessee could be added back in the assessment in terms of that section. If royalty was claimed and allowed in the subsequent years, i.e., 1969 and 1970, it was an incorrect claim made by the assessee and there may be a case for reopening the assessments relevant for those two years. But, certainly there is no case for adding back the entire liability up to 1971 in the assessment for 1972-73 in terms of Section 41(1) of the Act. We, accordingly, uphold the order of the Appellate Assistant Commissioner in deleting the addition.

3. In appeal before the Commissioner (Appeals), for assessment years now under consideration, the assessee had contested the validity of the initiation of proceedings under Section 147(a). The Commissioner (Appeals) referred to the reasons for reopening as recorded by the ITO to which we have adverted earlier as well as the findings of the Tribunal on arguments in contesting the appeal for the assessment year 1972-73. The Commissioner also adverted to the contention urged on behalf of the assessee before him, viz., that the truth or falsity of a transaction was not a primary fact but only an inferential fact. He has relied in his order on the judicial pronouncements cited in support of this proposition. The substance of the argument before the Commissioner was that there was no non-disclosure of any primary facts by the assessee and, therefore, initiation of proceedings under Section 147(a) was void. The Commissioner did not accept the plea of the assessee and eventually recorded findings in paragraphs 6 and 7 of his order as under : 6. I consider that the appellant suppressed the fact that the obligation to pay royalty ceased on 6-8-1968 when Wood Auto Suppliers Ltd. confirmed that the agreement dated 5-7-1962 should be considered as terminated. It was only when this letter was detected that the ITO discovered the suppression and the consequent escapement of income. Reassessment proceedings are fully justified and are upheld. 7. Sri Ratnakar was fair enough to admit that apart from the validity of the reassessments, there can be no further arguments on merits since the Tribunal's order relating to the assessment year 1972-73 had become final. The amounts brought to reassessment will, therefore, stand confirmed for all the three years in respect of royalties and profit under Section 41(1).

4. The learned counsel for the assessee submitted that the Commissioner was in error in coming to the conclusion that he did. He submitted that whether there was non-disclosure or not of any primary facts had to be considered in the light of the ratio of the judgment of the Allahabad High Court in the case of Modi Spg. & Wvg. Mills v. ITO [1975] 101 ITR 637. In other words, he contended that the degree of information which has to be furnished by an assessee was different at different stages and at a particular stage of assessment proceedings an assessee would be bound only to disclose such facts and furnish such particulars as the Act obliged him to disclose. In particular he referred to observations of their Lordships about the degree of disclosure to be made at different stages which is as under : ... The scheme underlying these sections seems to indicate that to begin with, at the time of filing of return, an assessee was merely required to furnish the particulars of his income in the prescribed form. In other words, he was to truly and fully supply the information sought for in various columns of the prescribed form of return. If the Income-tax Officer felt that the information conveyed, as per the prescribed form, was correct and was sufficient for making an assessment order, he could proceed to assess the person filing the return on its basis. At that stage no question of the assessee furnishing any information other than that required to be furnished in the prescribed form of return could arise.

Accordingly, if the assessee truly and fully disclosed all information required to be supplied in the prescribed form of return, no question of his failure to disclose any other particulars of his income at that stage could arise. The next stage in the process of making an assessment was where a return in the prescribed form had been filed but the Income-tax Officer felt that although the information conveyed by the return was sufficient for making an assessment order, but before that information could be acted upon, the assessee should be required to verify the same by producing evidence. In such circumstances, he could require the assessee to produce evidence in support of his return. Here again the assessee was required to produce evidence only in support of the statements made by him in the prescribed form of return and there was no obligation upon him to convey any other or further information or to produce evidence in support of any other matter which may ultimately be found to be relevant for the purposes of making an assessment in his case. There could yet be a third stage where the Income-tax Officer felt that not only the information conveyed in the return required verification but also that it was not sufficient for making an assessment order. In such a case, he was required to specify the points and to ask the assessee to produce evidence on that point. He could also require the assessee to produce some particular evidence having a bearing on that point. It is at that stage when the assessee was required by the Income-tax Officer to elucidate some particular point that the assessee had again been obliged to disclose all primary facts truly and fully in respect of that point.

Till this stage was reached, there was no obligation on the assessee to disclose or produce evidence in respect of the points other than those in respect of which the assessee was as provided in the prescribed form of return, obliged to furnish full and true information. In our opinion, so long as in the assessment proceedings, the third stage was not reached, the assessee could not be blamed or held liable for not disclosing some information which till then he was not required to furnish in the prescribed form but which ultimately was found to be relevant in connection with his assessment. (p. 649) The learned counsel submitted that there was no column in the return of income which required any elucidation of entries which appeared in the profit and loss account. His contention was that in the profit and loss account based on the sales of the year, commission as stipulated in the agreement with the English Company was calculated and claimed as a deduction. This claim, he submitted, was made because, according to the assessee, in the three assessment years now under appeal, the liability to pay royalty was a subsisting liability. He stated that in terms of the agreement only the English Company could have terminated the agreement. In particular he also laid stress on the fact that the letter of 6-8-1968 from the English Company was not addressed to the assessee but to New Indo Trading Company. This entity may have been an associate of the assessee concern but he submitted that the entity is not only different from the assessee concern and merely because the letter was marked for the attention of Trilochan Singh, who was the director of the assessee-company, it did not mean that it was a notice of termination of the agreement of the assessee-company with the English Company. It was also submitted that Trilochan Singh, no doubt, had sent a letter to the English Company dated 20-11-1968 purporting to confirm that the agreement with the English Company stood terminated.

But he submitted that this action of Trilochan Singh, never found mention in any of the meetings of the board of directors and, therefore, could not be construed as having received the concurrence of the board nor could we consider it as binding on the assessee-company.

It was stated that the assessee had obtained legal advice and they were informed that the agreement would be subsisting till by efflux of time mentioned in the agreement it stood terminated. In this regard he placed reliance on the letter dated 4-10-1975 from a firm of solicitors at Bombay-Smetham Byrne Lambert & Dubash-wherein they had mentioned that the agreement continued till 11-2-1971. It was further stated in the letter as under : Clause 8 of the agreement gives a right to Wood Auto only to terminate the agreement by giving three months' notice in writing to the company if Wood Auto were not satisfied that the product manufactured by the company did not have efficiency and standard of those manufactured by Wood Auto themselves and without any notice if for any reason Wood Auto ceases to manufacture the product in their ordinary course of business. Under this Clause 8 there is no right to the company to terminate the agreement.

Clause 9 of the agreement gives further right to Wood Auto to terminate the agreement by three months' notice in writing if the company fails to carry out the obligations undertaken by the company under the agreement. On the perusal of the agreement we do not find any clause which gives a right to the company to terminate the agreement.

It appears that during one of the visits of Mr. Trilochan Singh to England in July 1968 certain discussions took place between the company and the representatives of Wood Auto. Wood Auto wrote a letter to the New Indo Trading Co. confirming that the agreement be considered terminated and that it relieved 'you', viz., the New Indo Trading Co. of any payment for royalties and they looked forward to receive 'your', i.e., the New Indo Trading Company, confirmation that the points mentioned in the said letter would be adhered to.

Mr. Trilochan Singh as director of the company in reply by his letter dated 20-11-1968 confirmed that the agreement has been terminated by mutual consent and there is no amount payable by the company to Wood Auto for royalties.

You had consulted the writer some years ago in respect of the question of company's liability for payment of royalties under the agreement between Wood Auto and the company and we had advised you and we confirm that advised given by us to you is as set out in this letter.

We advised you that the agreement was between Wood Auto and the company and that the agreement gave Wood Auto only the right to terminate the agreement under Clauses 8 and 9 referred to by us hereinabove.

There was no right in the company to terminate the agreement. The letter addressed by Wood Auto to the New Indo Trading Co. cannot be a valid letter inasmuch as the termination notice is not addressed to the company. Mr. Trilochan Singh as a director of the company has addressed a letter in reply confirming mutual termination of the agreement but the letter written by Mr. Trilochan Singh is not under the authority of the company. It is not open to any one director, more particularly when he is not the managing director, to terminate the agreement unless it was specifically resolved by the company at a board meeting. It was open to Wood Auto at a later date to contend that their letter terminating the agreement was addressed to the New Indo Trading Co. which was not the party-with whom they had entered into the agreement and, therefore, the agreement was still subsisting and the company was liable to pay royalty in terms of the agreement. It was also open to Wood Auto to contend that acceptance of termination by mutual agreement by Mr. Trilochan Singh is also not proper and validly accepted.

It was also open to the company or other directors of the company to contend that Mr. Trilochan Singh had no authority to write the letter as he did and that the said letter written by him was not binding on the company.

In view of the aforesaid, it was decided that the company should continue to provide in its books the amount of royalties payable by it to Wood Auto under the agreement. Accordingly, the company made provision in its balance sheet and profit and loss account and such provision being made was an admission of liability on behalf of the company and on which if a claim was made, the company would be liable to pay.

The company committed breach of the agreement as it did not fulfil its obligations under the agreement with Wood Auto but the failure on the part of the company to carry out the obligations gives a right to Wood Auto to enforce the provisions of the agreement against the company. That, however, does not give any right to third parties.

It was, therefore, then decided that the company should continue to provide for royalty which it may become liable to pay to Wood Auto in the event of a claim being made and that the amount should be written off only after the agreement came to an end.

The learned counsel specifically drew our attention to the statement in the letter of the solicitors that there was a consultation with them some years earlier in respect of the question of the assessee's liability of payment of royalty and that they had advised the assessee in similar terms. He, therefore, sought to make a point that the action of the assessee in construing the royalty payable from year to year and claiming such amounts as deduction was bonafide and based on competent legal advice. According to the learned counsel, where non-statement of any facts was not deliberate and the omission was bonafide or accidental, the provisions of Section 147(a) would not be attracted. He invited our attention to the decision of the Kerala High Court in the case of M.O. Thomakutty v. CIT [1963] 47 ITR 872 and in particular certain observations at page 882 and contended that non-furnishing of certain facts where an assessee was under the bonafide impression that such facts need not be furnished or an accidental omission to furnish facts would not bring the case within the terms of Section 147(a).

According to the learned counsel, the provisions of Section 147(a) would be attracted only where the omission or failure on the part of the assessee to disclose fully and truly all material facts was the consequence of a deliberate decision to hold back information. The learned counsel also relied upon the decision of the Kerala High Court in the case of Sujir Ganesh Nayak & Co. v. ITO [1976] 104 ITR 524 and in particular certain observations at page 539. His submission in brief was that even if what was stated was untrue, it could not be construed as an omission or failure to disclose facts. Another decision pressed into service on behalf of the assessee was that of the Delhi High Court in the case of General Mrigendra Shunt Sher Jung Bahadur Rana v. ITO [1980] 123 ITR 329. It was submitted that escapement of income from assessment either due to a particular view of law or facts or a mistake on the part of the ITO would not tantamount to escapement within the meaning of Section 147(a). It was always open to the ITO to call for additional information and if he failed to do so and accepted the contention of the assessee, then it was submitted that there was no lapse on the part of the assessee which would merit invoking action under Section 147(a). Another judicial pronouncement relied on was that in the case of Imperial Chemical Industries Ltd. v. ITO [1978] 111 ITR 614 (Cal.) and in particular observations at pages 639 and 640. The contention was that it was not the duty of the assessee to point out each and every inference which the ITO was to draw and the analogy was put forth with reference to a finding of the Court in that case that as long as memorandum and articles of association of a company were produced, it was not necessary to draw the attention of the ITO to each and every clause therein.

5. Adverting to the finding of the Tribunal for the assessment year 1972-73, the learned counsel stated that the findings given therein about the applicability of Section 41(1) in relation to the assessment year 1969-70, viz., the remission of liability took place in 1968, itself, was not a finding necessary to be given for deciding the appeal for the assessment year 1972-73. He, therefore, stated that such finding of the Tribunal was not binding on us and certainly the ITO could not take refuge under the plea that assessment for the assessment year 1969-70 was being reopened in pursuance of or to give effect to a finding of the Tribunal.

6. Though the learned counsel submitted that as far as the merits are concerned there was a decision of the Tribunal for the assessment year 1972-73, in view of the material on record, he stated, it was clear that no remission of liability took place in 1968. For this proposition, he relied on a letter dated 14-4-1975 written by the English Company to the ITO wherein the company had categorically stated that they were entitled to royalties up to 1968 and they had mentioned that they would be grateful if the ITO could assist them to recover the same. His contention, therefore, was that no remission took place in 1968 of any liability and the company as late as in 1975 considered the liability to be outstanding. As long as there was no cessor in 1968, he submitted that the ITO for the assessment year 1969-70 was not justified in making an addition for liability remaining unpaid for earlier years of Rs. 1,60,067 by invoking the provisions of Section 41(1). Also, he submitted, that since the accounting year of the assessee for the assessment year 1969-70 was the calendar year, in any view of the matter, the assessee was bound to pay the royalty on sales up to 6-8-1968 and there was no warrant for the ITO disallowing Rs. 74,681 in toto. Even taking the letter of the English Company at face value and construing all points in favour of the view taken by the revenue, his submission was that at the most only royalty payable from 7-8-1968 to 31-12-1968 could be disallowed.

7. The learned departmental representative, in reply, took us through the provisions of Section 147(a). He stated that the word 'omission' as occurring in Section 147(a) was a colourless word and which merely refers to the not doing of something. For this proposition, reliance was placed on the observations of Chagla, CJ., in Pannalal Nandlal Bhandari v. CIT [1956] 30 ITR 57, 59 (Bom.). Therefore, he submitted that where some particular primary fact had not been stated, whether such non-statement was due to an accidental omission or even due to a bonafide view of law taken as long as the fact was not stated at the time the return was filed and prior to completion of the original assessment, provisions of Section 147(a) would he attracted. Reliance was also placed on the decision of the Calcutta High Court in the case of ITO v. Sudhir Kumar Bhose [1972] 84 ITR 60, 65 where the Court had stated that it was not material whether the non-disclosure was wilful or deliberate to give jurisdiction to the ITO under the provisions of Section 34 of the Indian Income-tax Act, 1922. It was also contended that it was not essential that all enquiries should be finalised before the original assessment was completed. Even if there was any suspicion originally and if the result on further enquiries revealed that there was non-disclosure of primary facts, the provisions of Section 147(a) would be attracted. This, the learned departmental representative submitted, was the ratio which emerged from the decision of the Supeme Court in CIT s. T.S. PL. P. Chidambaram Chettiar [1971] 80 ITR 467.

According to the learned departmental representative, the relevant decisions on the point had all been reviewed and considered by the Andhra Pradesh High Court in the case of K.C.P. Ltd. v. ITO [1984] 146 ITR 284. In particular he stated that the Andhra Pradesh High Court in K.C.P. Ltd.'s case (supra) had dissented from the decision in Modi Spg.

& Wvg. Mills' case (supra) which was relied on by the learned counsel.

The learned departmental representative stated that as long as the ITO has reason to believe that there was omission or failure on the part of the assessee to disclose fully and truly material facts and that belief was bonafide, then jurisdiction could be validly assumed under Section 147(a). No further fetter could be placed on the discretion of the ITO.The learned departmental representative also submitted that the letter of the Bombay firm of solicitors dated 4-10-1975 was bereft of any details as to when the purported earlier consultation with the assessee took place. According to him, therefore, there was no material on record to show that the assessee had acted on the basis of legal advice in claiming the royalty as payable from year to year in spite of the agreement with the English Company have stood terminated in 1968 and there being no further dues. He also stressed on the fact that the person who originally signed the agreement was Trilochan Singh, a director. It was Trilochan Singh again who informed the English Company by the letter of 20-11-1968 that the agreement stood terminated and there were no further dues. Even if the letter dated 6-8-1968 was addressed to New Indo Trading Company, he submitted, it was marked for the attention of Trilochan Singh and Trilochan Singh replied on behalf of the assessee-company on 20-11-1968 expressly acknowledging the receipt of letter dated 6-8-1968. Therefore, it was clear, the learned departmental representative stated, that the assessee had full knowledge of the termination of the agreement. He referred to the provisions of Section 290 of the Companies Act, 1956 and submitted that acts done by a person as a director would be valid even if it was discovered later that the appointment of director was invalid because of any disqualification. Therefore, he emphasised that merely because there has been no formal resolution of board of directors in the minutes about the termination of the agreement, the agreement stood validly terminated. He also furnished a copy of extracts from the minutes of the board of directors on dates 7-6-1962 and 2-8-1962 to show that the board has specifically requested Trilochan Singh to initiate a collaboration agreement with the English Company and minutes of 17-5-1963 and 12-11-1963 were referred to show that Bhupinder Singh returned after successful period of training with the English Company and on 12-11-1963 Devinder Singh was authorised to make payments to the English Company. Bhupinder Singh was the managing director of the assessee-company and Devinder Singh was director. The fact that the agreement was not being adhered to, it was stated that it was brought to the notice of the company and discussed in the board meeting on 4-4-1966. The learned departmental representative also relied on order sheet entries in connection with the assessment year 1972-73 wherein the assessee was specifically called upon to show that the sales had been certified in terms of the agreement by an order sheet entry dated 19-2-1975 and the assessee was also asked to state whether there was any dispute with regard to the payment of royalty till then. The assessee had contended that the certificate regarding sales had been duly prepared. The learned departmental representative drew our attention to the mention by the ITO on 26-3-1975 that in the balance-sheet (apparently referring to that of 1972-73) it was stated by the chartered accountant that the royalty was shown payable to the English Company and in the letter of 26-3-1975 the learned departmental representative submitted that there was a statement by the assessee that non-payment of royalty was not due to any dispute regarding the quantum of royalty payable to the English Company. The learned departmental representative, therefore, submitted that even when later on specific queries had been asked by the ITO the assessee did not inform of the fact of termination of the agreement. The learned departmental representative also took us through the statements recorded from Bhupinder Singh Sahney dated 20-6-1975 and 17-11-1975 and also statements of Trilochan Singh in response to summons for hearing on 5-1-1979 (date of statement not recorded). He submitted that there were material contradictions all of which went to show that the assessee had withheld information about the cancellation of the agreement. For all these aforesaid reasons, the submission of the learned departmental representative was that initiation of action under Section 147(a) was perfectly legal.

8. Coming to the merits of the quantum of royalty disallowed, the learned departmental representative submitted that the Tribunal in its order for the assessment year 1972-73 had given a categorical finding that remission took place in 1968. Therefore, under the provisions of Section 41(1) royalty shown as payable for earlier year but not paid, it was submitted, was fully assessable in the assessment year 1969-70.

He stated that all the relevant material was considered by the earlier Bench and therefore, such rinding should be considered by us as final, especially when the assessee had not contested the same for the assessment year 1972-73. Regarding the plea of the learned counsel that the assessee had offered the entire amount of royalty payable for assessment in the year 1974-75 on the ground that the remission took place in that year, the submission of the learned departmental representative was that the amounts had to be assessed in the year in which remission took place and if assessment of amounts under Section 41(1) or disallowances of royalty claimed was upheld in any earlier year, it will be open to the assessee to seek for appropriate relief for the assessment year 1974-75. He stated in particular that there were provisions in the Act which authorise the grant of relief by waiving of time limit also and such provisions could be resorted to by the assessee. For these reasons, he submitted, in quantum also no relief was due for the assessment year 1969-70.

9. We shall advert later to specific contentions which are applicable only for the assessment years 1970-71 and 1971-72 after dealing with the points discussed above which are common for each of the assessment years now under consideration.

10. In order to assume jurisdiction validly to initiate proceedings under Section 147 (a) it is settled law that a mere vague feeling on the part of the ITO that there may have been omission or failure on the part of the assessee to disclose fully and truly all material facts is not sufficient. Authority for this proposition would be the decision of the Supreme Court in Chhugamal Rajpal v. S.P.Chaliha [1971] 79 ITR 603.

The decision of the Supreme Court in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 is authority for the proposition that there must be a reasonable nexus between the material and the formation of the requisite belief. The Supreme Court in the case of ITO v. Madnani Engg.

Works Ltd. [1979] 118 ITR 1 observed that mere disclosure of belief without setting out the material on the basis of which such belief was formed was not sufficient to assume jurisdiction under Section 147(a).

After referring to the aforesaid judicial pronouncements the Andhra Pradesh High Court in the case of K.C.P. Ltd. (supra) went on to observe as under : In this context, we must mention that the law with respect to subjective satisfaction is exhaustively stated in the celebrated decision of the Supreme Court in Barium Chemicals Ltd. v. Company Law Board [1966] 36 Comp. Cas 639 where it has been held that, while the formation of the opinion is subjective, the existence of facts upon which the satisfaction is formed is not subjective and that the requisite opinion, satisfaction must be formed on relevant material and honestly and fairly. So long as that is done, the Court cannot interfere with, nor can it go into the adequacy of, the material.

While a non-existent fact cannot be made a ground for formation of the opinion, the Court would not at this stage investigate into the truth or otherwise of the facts, upon which the appropriate authority says that it has formed the satisfaction.... (p. 291) Before applying the aforesaid tests we would set out, in extenso, the letter of the English Company dated 6-8-1968 addressed to the New Indo Trading Company but specially marked for the attention of Trilochan Singh (a director of the assessee-company) : In consequence of your visit to our office during July it is confirmed that the above mentioned agreement signed on the 5th July 1962 between Wood Auto Suppliers (P.) Ltd. and Sahney Steel & Press Works Ltd. be considered terminated.

It also means that under no circumstances are you to use the name 'Wood Auto' either in advertisements, copy or on cartons, or in any other way to connect 'Wood Auto' with 'Auto Sahn' products.

We look forward to receiving your confirmation that the above mentioned points will be adhered to.

We would also set out, in extenso, the reply sent by Trilochan Singh as director on behalf of the assessee-company dated 20-11-1968 to the English Company : This has reference to your letter of the 6th August, 1968 addressed to our associates, The New Indo Trading Company.

We confirm that the above mentioned agreement between yourselves and ourselves has been terminated by mutual consent and there is no amount payable by us to you for royalties and neither party has any claim against the other arising out of or in connection with the above mentioned agreement on any score whatsoever. We also confirm that under no circumstances will we use the name 'Wood Auto' either in advertisements, copy or on cartons, or in any other way to connect 'Wood Auto' with 'Auto Sahn' products.

We have referred to the facts in the course of this order wherein the ITO in 1975, when he noticed in connection with the later assessment year that royalty had not been paid, had enquired of the assessee whether nonpayment of the royalty was in dispute and the reply was that it is not due to any disputes. The ITO also noticed the aforesaid two letters. At the stage of initiation of proceedings under Section 147(a) it is not essential that the conclusion which is drawn by the ITO that income had escaped assessment consequent to omission or failure on the part of the assessee fully and truly to disclose all material facts would be the final conclusion arrived at on ascertaining the entire evidence. What is necessary is only that the belief formed should not be a mere pretence or make-believe and it should have a rational bearing to the conclusion formed at that stage that income had escaped assessment. The letter of Trilochan Singh dated 20-11-1968 states unmistakably that the agreement stood terminated by mutual consent and further categorically affirmed that there was no amount of royalty payable by the assessee to the English Company and neither party had any claim against other. The date of this letter fell in the accounting period relevant to the assessment year 1969-70 and the ITO could certainly have formed the belief that since the agreement for payment of royalty stood terminated and by mutual consent no royalty was payable, the claim for payment of royalty was inadmissible and the royalty which stood allowed originally would have to be disallowed. He was entitled to form the belief that the amount of royalty was allowed origi-ally consequent to omission or failure on the part of the assessee to fully or truly disclose all the material facts. The material facts in the present case being the two letters referred to.

The adequacy of the reasons which led to such belief is not for us to adjudicate upon.

11. The learned counsel sought to submit that where the omission was not deliberate the provisions of Section 147(a) could not be invoked.

To support this proposition following observations of the Kerala High Court in the case of M.O. Thomakutty (supra) was pressed into service : ... There is nothing to indicate that at the time the assessee filed his return his accounts relating to his Cochin business had been completed and that he knew exactly what his income was from that business. In the return he had only estimated that income to the best of his belief. The fact that when the accounts were finally closed it was seen that the income was actually much more, is not sufficient to hold that the assessee had not truly and fully disclosed his income unless there is material to show that the assessee knew at the time he submitted his return that his income was not that which was estimated by him. There is no such material.... (p. 882) The aforesaid observations, in our view, only go to show that where an assessee was not aware of a particular fact, it could not be stated that there was omission on the part of the assessee to disclose the fact. This is because where someone is totally unaware of the fact, the question of disclosing it does not arise and nobody can be asked to do impossible. In the present case the fact of the existence of the two letters was known to the assessee-company. The letters themselves may not have figured in a formal board meeting but reading the statements of Bhupinder Singh Sahney, managing director and Trilochan Singh already adverted to, it is clear that the company was aware of the contents of the letters because the persons connected with the management including the managing director knew the exchange of such letters. Bhupinder Singh in his statement dated 17-11-1975 to the question whether the company was aware of the letter which Trilochan Singh had written to the English Company replied that the letter was addressed by director Trilochan Singh but it was not discussed in the board meeting. He also mentioned in reply to a specific question that the advice of solicitors was sought after Trilochan Singh had written the letter dated 20-11-1968. It is, therefore, clear that those connected with the management of the assessee-company including the managing director were aware of the letter. The ratio of the decision of the Kerala High Court relied upon by the learned counsel, therefore, in our view, does not apply in the present case. On the other hand, the Calcutta High Court in the case of Sudhir Kumar Bhose (supra) has stated at page 65 that the question whether belief was bonafide that such information was not relevant is immaterial inasmuch as the nondisclosure need not be wilful or deliberate in order to give jurisdiction to the ITO for reopening a case under Section 34. The learned counsel for the assessee had in support of his contention placed considerable reliance on the judgment of the Allahabad High Court in the case of Modi Spg. & Wvg. Mills (supra) as also the decision of the Kerala High Court in the case of Sujir Ganesh Nayak & Co. (supra). The first case was pressed into service to highlight the proposition that the non-disclosure or omission had to be viewed with reference to different stages of assessment proceedings. In other words, at the stage of filing the return the only facts required by the return would have to be furnished and at this stage if nothing further was stated, there would be no omission. The omission would arise if specific facts are later asked, etc. and information is not given. In the letter case the observations at page 539 of Sujir Ganesh Nayak & Co.'s case (supra) were relied on to submit that if there was a false statement there would be no omission or failure to furnish particulars.

The observations of the Kerala High Court in Sujir Ganesh Nayak & Co.'s case (supra) are as under : The controversy here centres round the truth or falsity of certain loans. In other words, the facts in dispute here are the loans. They are either facts or not facts. If the loans are real transactions and so are facts then irrespective of the question whether they are primary facts or inferential facts, as they have been mentioned in the return, there is no non-disclosure for Section 147(a) to apply.

On the other hand, if they are bogus and consequently not facts, then also Section 147(a) has no application because mention of them in the return is only a positive or affirmative statement of false transactions which are not in the region of facts and by no stretch of imagination can it be said to be a negative act of nondisclosure of facts. In either case Section 147(a) has no application. If the Income-tax Officer has reason to believe that the assessee had made in his return incorrect or false statements not amounting to facts he has to look to other provisions in the Act for proceeding against the assessee and not Section 147(a). Righteous indignation may be felt if assessment was made accepting the case of the assessee that he had taken loans and subsequently the loans are found to be bogus but that is not a justification for invoking Section 147(a) unless the case falls within it. (p. 539) Fortunately for us we have the observations of the Andhra Pradesh High Court which are binding on us in the case of K.C.P. Ltd. (supra) which, in our view, provides a complete answer to both the propositions relied on by the learned counsel. These observations are as under : The form which was prescribed for the relevant assessment year, undoubtedly, did not contain any column requiring the assessee to state whether it had availed of the initial depreciation in respect of the machinery for which it is claiming normal depreciation in that year. But, we are not prepared to hold that the non-disclosure must be confined only to failure to fill up the columns contained in the form of return prescribed by the Rules. We find no reason to give such restricted meaning. Section 147 speakof omission or failure to disclose fully and truly all material facts necessary for the assessment for that year. Which fact, or facts, are material for assessment for that year is a question of fact to be decided in each case and it is not possible to lay down any hard and fast rule. Take the case of an assessee who deliberately makes a false statement.

Can it be said that making a deliberately false statement does not amount to omission or failure to disclose fully and truly all facts material for the assessment, merely because that false statement is made in the appropriate column of the return...? (p. 295) As pointed out by us earlier, there is no reason for restricting or curtailing the meaning of the words 'omission or failure on the part of the assessee...to disclose fully and truly all material facts necessary for his assessment for that year...'in the light of the proforma of the return prescribed by the Rules. Doing so would amount to defining the material facts as those facts which are required to be stated by the return and none else, This in our opinion, would be an unwarranted cutting down of the natural and reasonable ambit and field of the said words. (p. 298) In the same judgment the Andhra Pradesh High Court in deciding whether the provisions of Section 147(a) are attracted or not stated as under: ... While it is not necessary for our purpose to hold that the assessee is guilty of a deliberately false statement in this case, it is sufficient for us to hold that there has been omission or failure, as the case may be, on the part of the assessee to disclose fully and truly all material facts necessary for assessment for that year, inasmuch as it has failed to disclose the fact that it had availed of the initial depreciation and had thus crossed the permissible ceiling, even before the said assessment year. This claim for normal depreciation, in the circumstances, necessarily implies concealment of a material fact, viz., the fact of availment of initial depreciation. That fact is material because if that fact were known, the assessee would not have been allowed the normal depreciation. (p. 296) Hence, in the present case, it is not necessary for us to decide whether the assessee had deliberately withheld the information or not about the existence of the two letters or after knowing that royalty was not payable had deliberately not disclosed the facts. All that we have to see is that whether there was any omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The two letters which we have referred to in the background of the case are certainly material facts which were not disclosed and, thus, stood omitted to be disclosed. On the basis of these two letters the ITO could have considered that income assessable in the year 1969-70 and also for the subsequent two assessment years had escaped assessment. We may mention that a contention was put forth that the assessee had secured legal advice and it was on the basis of legal advice that the assessee had continued to claim royalty payable, that the legal advice was that the agreement did not stand terminated and would have to spend itself by efflux of time. The letter of the solicitors relied on was dated 4-10-1975. The letter spoke of the assessee having approached them earlier for advice when they gave the advice that the royalty would continue to be payable. Regarding the point of time at which advice was taken, Bhupinder Singh in his statement dated 17-11-1975 said it was after the letter was written by Trilochan Singh on 20-11-1968. No documentary evidence was produced to corroborate the actual date when such advice was taken. Trilochan Singh of course stated that they were awaiting a reply from the English Company to the letter dated 20-11-1968 and, therefore, they were apprehending that the claim may be raised before them at any time. To a specific question whether any fee was paid to the solicitors to obtain the opinion, his reply in his statement was that the assessee had standing solicitors for whom payments were made in lump sum without itemised details. In view of this categorical statement we, at the hearing before the Tribunal, required the assessee to inform us, if possible with reference to books of account, whether any payments to the solicitors in the accounting periods 1968-69 and 1970 now under consideration could be shown. In the period of about a fortnight which was allowed no such details were shown by the assessee and the learned counsel submitted that in the time available on the scrutiny that was possible within such time, such payments to the solicitors could not be identified. We have, therefore, to hold that as at present the assessee has not established that legal advice was taken at a point of time anterior to the making of claims for deduction of royalty in the accounting period referred to.

12. The learned departmental representative had also relied on the judgment of the Supreme Court in the case of Malegaon Electricity Co.

(P.) Ltd. v. CIT [1970] 78 ITR 466 in support of the proposition that material considered relevant in deciding whether the claim under Section 41(1) or for allowance as deduction of royalty would be relevant to decide whether invoking of the provisions of Section 147(a) are in order or not. It is not necessary for us to dwell on this contention any further in the light of our findings earlier based on which we have come to the conclusion that the initiation of action under Section 147(a) was in order for each of the assessment years now under consideration since the ITO had reason to believe that there was omission or failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment consequent to which there was escapement of income and the adequacy of such reasons is not for us to pronounce upon.

13. Though the learned counsel initially had stated that he would not be contesting the merits of the inclusion, he submitted that since the entire gamut of proceedings was relied upon by the revenue and since emphasis was placed on several letters to the company, it had come to light that the English Company had categorically stated in the letter dated 14-4-1975 relied on by the department that 'we are entitled to royalties up to 6-8-1968. If you could assist us in this respect we should be obliged'. This statement was in reply to a letter of 5-4-1975 where the ITO had pointed out to the English Company that a careful reading of that letter of 17-4-1974 showed that the liability of the assessee to pay royalty no longer exist. According to the learned counsel, as long as there was no remission of the dues in 1968 under the provisions of Section 41(1), the amount of Rs. 1,60,067 could not be brought to tax. He stated that the findings of the Tribunal for the assessment year 1972-73 that remission took place under Section 41(1) in 1968 was not a finding necessary for deciding the appeal for that year and was not binding on us and in any event since the question whether there was cessor arose for consideration this year, it was open to him to urge that cessor did not take place in this year because there was no remission by the English Company of dues up to August 1968 even in 1975. He also stressed that the assessee on its part had shown cessor of the entire liability in the assessment year 1974-75 and, therefore, there was no question of the assessee trying to gain any undue advantage.

14. The learned departmental representative, on the other hand, submitted that all material had been considered by the Tribunal in rendering its decision for the assessment year 1972-73 and it was not open to us to review the matter further.

15. We have considered the rival submissions. In the light of the ratio of the decision of the Bombay High Court in the case of H.A. Shah & Co.

v. CIT [1956] 30 ITR 618 though there is no res judicata in income-tax proceedings, a successor Tribunal should be slow to depart from a finding of the earlier Tribunal. It is necessary to consider all facts which are particularly relevant for particular assessment years now under consideration. No doubt as stated by the learned counsel the English Company had stated in 1975 that they were entitled to royalties up to 6-8-1968, in a subsequent letter of 8-12-1978 the English Company stated that it was not known how the assessee-company continued to claim royalties after the cancellation of the agreement of 5-7-1962.

However, the fact remains that the English Company did not at all write to the assessee asking for any payment of any earlier dues. They did not also take any legal action for recovery and by letter dated 20-11-1968 signed by Trilochan Singh as director on behalf of the assessee-company it was categorically stated that there was no amount payable by the assessee to the English Company for royalties and no party had any claim against other. This was only a confirmatory letter issued by the assessee and the English Company did not controvert the statement in this letter. In view of the categorical stand taken by the assessee in the letter referred to, we cannot come to a finding different from that arrived at by the earlier Bench that having regard to the correspondence by mutual consent, the agreement of 1962 between the English Company and the assessee was terminated in August 1968, releasing the assessee from the obligation to pay the royalty. On these facts, we are unable to differ from the finding of the earlier Bench that the cessation of the liability referred to in Section 41(1) of Rs. 1,60,067 and the disallowance of royalty claim of Rs. 74,861 for the assessment year 1969-70 is in order.

16. As far as the assessment year 1970-71 is concerned, for similar reasons as set out by us in deciding the appeal for 1969-70, the disallowance of royalty of Rs. 74,060 is in order. For the assessment year 1971-72, for the same reasons as in earlier years we hold that the disallowance of royalty of Rs. 85,288 is in order.

17. For the two assessment years 1970-71 and 1971-72, the assessee also contests certain disallowances. For the assessment year 1970-71, the disallowance is of Rs. 15,440 which represents purchase price of certain articles said to have been purchased from one Manmohan Dass & Co. and the same is contested and for the assessment year 1971-72, a similar disallowance of Rs. 40,430 is contested. As observed by the Commissioner (Appeals), the ITO had marshalled all the facts, For purposes of the present appeals, it is sufficient to state that the identity of the purported supplier had not been fully established by the assessee and in any event, therefore, since payments were not made by crossed cheques, the provisions of Section 40A(3) of the Act clearly apply and the deductions are inadmissible. For purposes of the present appeals, it is not necessary for us to elaborate on material discussed in the order of assessment and we uphold the disallowances of both the items in question for the respective assessment years.

18. Before parting with these appeals we must state that on the date of last hearing a request was made by the counsel appearing for the assessee to grant an adjournment so that the senior counsel could be engaged. We did not accede to the request since the case had been fully argued from all angles in a detailed manner, with reference to all relevant case law on the subject by the learned counsel for the assessee and the learned departmental representative.


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