1. These are three sets of income-tax references submitted in a consolidated form by the Income-tax Appellate Tribunal (Delhi Bench 'C') in compliance with the directions of this court under section 66(2) of the Indian Income-tax Act, 1922. One set pertains to the assessment of the Nawabganj Sugar Mills Co. Ltd., and is for assessment years 1948-49 to 1950-51. In the second set, the assessed is the Basti Sugar Mills Co. Ltd., and concerns assessment years 1947-48, 1948-49 and 1951-52. The third set involves only one assessment year, viz., 1947-48, and the assessed here is the Punjab Sugar Mills Co. Ltd.
2. Amongst these assessed, the Nawabganj Sugar Mills Co. Ltd., and the Punjab Sugar Mills Co. Ltd., maintained accounting years which ended every year on October . The accounting years of the Basti Sugar Mills ended on April 30, of every year.
3. These three companies, as their names suggest, have been carrying on the business of manufacturer and sale of sugar. They were controlled by the Narang Group which was headed by late Shri Gokulchand Narang. Since common questions of facts and law were involved, the Tribunal has considered it appropriate to submit this consolidated statement. In each year and case the question referred, for the opinion of this court, has been as under :
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the provisions of section 34(1)(a) were rightly invoked ?'
4. The three companies had, in the course of their business, appointed selling agents in different areas for sale of the sugar produced by them. They were being paid commission at the rate of twelve annas per cent. on sales effected through them. However, during the second world war, sugar became scarce and, thereforee, in the year 1942, the Government introduced Central control on the sale and distribution of sugar. there under it could be sold only under the direction and with the permission of the Government.
4. In the same year, another company known as the Gokulnagar Sugar Mills Co. Ltd., was incorporated. Its chairman was also late Shri Gokulchand Narang. This company was made the sole selling agent for sale of sugar by the present three assessed. A resolution was passed by the board of directors of the Nawabganj Sugar Mills Co. Ltd., on July 26, 1944, to the following effect :
'Resolved that sugar selling agency of the Nawabganj Sugar Mills Co. Ltd., be given to the Gokulnagar Sugar Mills Co. Ltd., at 12 annas per cent.'
5. Similar resolutions were stated to have been passed by the other two assessed.
6. In terms of these resolutions, the assessed-companies started paying commission at the rate of 12 annas per cent. to the Gokulnagar Sugar Mills Co. Ltd., (hereinafter called the 'Gokulnagar Co.') on the entire sales for the sugar season 1943-44, and onward.
7. When the assessment of the years involved in the present references of the assessed came up before the ITO, those commission payments to Gokulnagar Co., were claimed as deductions by each of the assessed. The ITO (Companies Circle) during the course of assessment required these assessed to furnish information, inter alia, since when Gokulnagar Co., was acting as selling agents and receiving commission. The resolutions authorising them to act as as selling agents were also required to be quoted and so also what work that company had actually done as selling agents. This is apparent from a letter which the ITO addressed to the managing agent of the Nawabganj Sugar Mills Co. Ltd., on May 18/20, 1950. The Nawabganj Sugar Mills Co. Ltd., then in its reply dated June 16/17, 1950, submitted, inter alia, as under :
'M/s. Gokulnagar Sugar Mills Co. Ltd., are active as our selling agents from July 26, 1944. Copy of the resolution passed by our board of directors is enclosed herewith for your perusal. The work that the Gokulnagar Sugar Mills Co. Ltd., are doing is the same as all other selling agents do. They are sole in charge of our sales and appoint sub-agents for executing sales at various places whom they pay sub-agents commission from their own pocket. They are responsible for conducting the sale honesty and diligently and they are responsible to the company if there is any loss in delivery or in case any trader refused to accept delivery. The sugar is dispatched on their responsibility.'
8. Similar queries, it is stated, were made and replies submitted in the cases of the other two assessed as well.
9. The ITO, thereafter, completed the assessment of all these years and without specifically discussing, in his orders, the nature and basis for allowing the commissions paid to the Gokulnagar Co., allowed those deductions.
10. Thereafter, assessment for the assessment years 1951-52 and 1952-53, came to be effected by the ITO of the present three assesseds. During the course of the same the ITO probed in detail into the nature and basis for allowance of commission to the Gokulnagar Co., and whether the latter had, in fact, rendered any service as selling agents in order to earn those commissions. He then found that there were no selling agency agreements executed between the parties nor the terms and conditions or the period of agencies had been settled. No resolution of Gokulnagar Co., beside existed, whereby it had agreed to act as selling agents of the assesseds. It was further observed that with the Government control on sale and distribution of sugar in the year 1942, there was little which the selling agents were to perform. Gokulnagar Co., was found running in loss. Under the circumstances, the creation of the so-called sole selling agencies, was held as a mere device enacted with a view to reduce the tax liabilities of the assessed-companies. It was noted that the selling agents were not required to render any service to the assessed-companies during the control period, and as a matter of fact, did not render any service thereafter even during the de-control and free sale periods from 1947. Thus it was observed that the arrangements about the payment of commissions to Gokulnagar Co., were liabilities created by the assessed-companies for extra-commercial considerations and were in fact artificial agencies motivated to divert the profits of the assessed-companies in order to obtain reduction of the legitimate tax liabilities. Various other factors were taken into account such as sub-agents directly communicating and obtaining commissions from the assessed, and the Gokulnagar Co., not possessing any material correspondence to show that the sales were effected through it. No deposit whatsoever in the form of security was beside taken from the Gokulnagar Co., for acting as selling agents of the assessed. It was also not experienced in the sale of sugar as it had started manufacturing sugar in 1943. It was further found that the sales were entered into by the assessed-companies with the prospective buyers directly and the sale proceeds were realised through banks.
11. The ITO, thereforee, disallowed deductions of the selling agency commissions paid to Gokulnagar Co., by the three assesseds for the assessment years 1951-52 and 1952-53.
12. These decisions were upheld in appeals by the AAC and the Appellate Tribunal. The assesseds then, it is stated, sought to obtain references before the High Court but without success. Their attempt to get those decisions set aside from the Supreme Court also failed and their petitions for seeking references were rejected.
13. Having come to the findings for the assessment years 1951-52 and 1952-53 that no services whatsoever were rendered by the Gokulnagar Co., as selling agents of the three assesseds and that the payments of commission to it were mere devices enacted to divert profits, the ITO had recourse to reassessment proceedings, under s. 34(1)(a) of the Indian I.T. Act, 1922, for the years involved in the present references against the three assesseds. These assesseds on their part strongly refuted the propriety of the commencement of the reassessment on the ground that all primary and material facts were already before the ITO when the original assessment were completed and he had, in fact, applied his mind to the propriety of the commissions paid. No change of opinion at the reassessment stage, it was pleaded, was permissible. Reference was made to the specific enquiries which the ITO had made about the nature of these commissions at the original assessment stages and the replies which the assessed, as already reproduced above, had submitted. On merits also, the assesseds vehemently pleaded that there was no warrant for assuming that the Gokulnagar Co., was a mere figure-head and had not rendered any service as selling agents. Ample material and circumstances, it was pointed out, existed which showed that services were in fact rendered and the commission payments were normal commercial transactions. Reference was made to similar commissions which the assessed had been earlier paying to their such selling agents. In this process, it was pleaded the assesseds were able to absolver themselves of the work and responsibilities of dealings with sub-agents or buyers and thus secured themselves from incidental losses which could accrue in the course of dispatch and sale of the sugar. All those responsibilities were said to have been taken over by the Gokulnagar Co., as selling agents.
14. These contentions did not prevail with the ITO, who after going through the entire facts and circumstances of the cases, again came to view that the Gokulnagar Co., had not rendered any service whatsoever to the assesseds during the present years. These facts, it was found, had not been disclosed by the assesseds at the original assessment stages and, thereforee, they had failed to fully and truly disclose all the material facts. In the circumstances, recourse to reassessment proceedings was held justified. These decisions were again upheld in appeals by the AAC and the Appellate Tribunal. The three assesseds then sought to obtain references under s. 66(1) of the Indian I.T. Act, 1922, but the Tribunal declined to submit any statements on the ground that the controversies involved were entirely factual.
15. It was thereafter that the assesseds moved this court and under its directions the present consolidated statement of the case had been submitted by the Tribunal under s. 66(2). The question on which references were directed to be made has already been reproduced above. It is confined to the legal justification for holding that the provisions of s. 34(1)(a) of the Act were rightly invoked.
16. No question was directed to be referred, nor has been actually referred on the controversy relating to the actual rendering of services by the Gokulnagar Co., as selling agents of the assesseds. To that extent the findings have been treated as entirely factual. This court is, thereforee, not embarking upon or probing into the propriety of those findings. They were essentially those of fact. They show that all the contentions raised by the respective parties were duly considered by the I.T. authorities and the Appellate Tribunal. No material evidence was ignored nor any irrelevant evidence or consideration was taken into account. The decision of the Tribunal cannot also be termed in any manner as perverse or arbitrary to justify interference by this court in their factual appraisement. We thereforee, proceed after accepting that those findings being based on facts are conclusive and are not open for purview of this court. In fact, the controversy in this regard to an extent stands settled, when for the assessment years 1951-52 and 52-53, the assessed failed to get those findings interfered with or set aside up to the Supreme Court. The facts involved in those years were substantially similar as in the present years. Rather in these yeas the control over the sale and distribution of sugar to a considerable extent was more rigorous.
17. We, thereforee, advert to the controversy whether the reassessment proceedings under s. 34(1)(a) of the Indian I.T. Act, 1922, were legally justified.
18. The sum and substance of the case of the assesseds in this regard has been that all primary and material facts were already before the ITO when the original assessments were made. The Govt. control over the sale and distribution of sugar was known to the ITO and the assesseds too had apprised of the appointment of Gokulnagar Co., as their selling agents. The deductions of commissions paid to it were duly claimed and were allowed. The ITO, it is next pointed out, had not as a matter of course without applying his mind permitted their deductions. Rather he made specific enquiries about the nature and basis of these payments and what work the selling agents had actually been doing. The assesseds then submitted their written replies elaborating therein their version as to the enquiry raised. Reference in this regard was made to the letters exchanged in May/June, 1950, between them and the ITO about which reference has already been made above. It was after considering all these facts, it is contended, that the ITO allowed deductions of commission payments. No change of opinion on the same facts, it has been asserted, is permissible at reassessment stage and this is what the ITO has attempted to do in the present cases.
19. From the side of the revenue, on the other hand, it has been pleaded that the present are not cases of change of opinion but those where the assesseds had entirely failed to fully and truly state the facts before the ITO at the original assessment stages. They had, it is pointed out, falsely represented that the Gokulnagar Co., was rendering services as selling agents while they actually were not doing so. When this primary and basic fact, it is pointed out, was wrongly stated and it was not brought out that they did not render any service whatsoever, they should be treated to have not fully and truly disclosed the material facts within the meaning of these words under s. 34(1)(a). The revenue in the circumstances, it is pleaded, was fully justified to have recourse to reassessments.
20. We have heard the parties and given our utmost consideration to all the circumstances. Section 34(1)(a) of the 1922 Act envisaged recourse to reassessment proceedings where the ITO had reason to believe that by reason of the omission or failure on the part of the assessed to disclose fully and truly all material facts necessary for his assessment, income, profits or gains, chargeable to income-tax had escaped assessment, or had been made the subject of excessive relief. It is now well settled that under these provisions, all that an assessed was enjoined was to make a full and true disclosure of all materials and primary facts. Once he had done so, it was for the ITO to draw his own inferences and conclusions there from. It was not for the assessed to thereafter guide him or give directions towards those inferences or conclusions. (See in this respect the decision of the Supreme Court in the case of CIT v. Burlop Dealers Ltd. : 79ITR609(SC) ).
21. There is also no gainsaying that once the ITO had formed an opinion on the basis of inferences or conclusions drawn from those material facts, he was later precluded from changing that opinion by way of resort to reassessment. There should, however, be something positive to show that there was in fact such formation of opinion at the original assessment stage. If initially no opinion was formed, the question of change therein could not be said to take place. Rather the Explanationn added to s. 34 made it clear that the mere production before the ITO of account books or other evidence from which material facts could with due diligence have been discovered by the ITO would not necessarily amount to disclosure within the meaning of that section. The Explanationn thus plainly postulated appliance of mind by the ITO and formation of some opinion.
22. The Supreme Court has thus in the case of Malegaon Electricity Co. P. Ltd. v. CIT : 78ITR466(SC) , held from the cryptic statement of the ITO in the original assessment order that 'no adjustment is necessary', that the Tribunal was not justified in drawing the inference that the ITO had considered all the relevant facts. There the assessed had in the course of original assessment proceedings, informed the ITO about the sale and how the sale price was determined and brought to his notice, the minutes of the board meetings of the assessed and of the purchasing-company and the agreement between them and also submitted a statement of unabsorbed depreciation which set out the depreciation accrued as well as that allowed. After setting off the unabsorbed depreciation, the ITO determined the assessed's income to be nil, observing (p. 469) :
''On going through these documents and the copies of the resolution passed by the shareholders of the purchasing-company, it is seen that no adjustment is necessary in the manner...''
23. Subsequently, the ITO reopened the assessment under s. 34 (1)(a) of the Act and by an order of reassessment assessed the assessed to tax on the profits earned by it under s. 10(2)(vii). In these circumstances, it was observed that if any part of the sale proceeds could be deemed to be profits under s. 10(2) (vii) then the assessed had a duty to include it in its return and its failure to do so would amount to failure on its part to disclose fully and truly the material facts for its assessment and would bring its case within the scope of s. 34(1)(a).
24. In another decision in the case of CIT v. T.S. PL.P. Chidambaram Chettiar : 80ITR467(SC) , the Supreme Court observed that the mere fact that there was some vague information before the officer at the time of the original assessment that the assessed's father had secretly received a sum of Rs. 1,50,000 from the mortgagor was by itself not sufficient to bring to tax that amount particularly in view of the fact that the assessed had denied the fact. The fact that the officer could have made further inquiry into the matter but did not do so did not take the case out of s. 34 (1)(a) as the assessed had failed to place truly and fully all the material facts before him. The remarks made by the officer in the order sheet did not amount to a decision taken by him on the basis of facts found but had to be treated as casual observations. In that case, under a compromise decree in a suit brought on the basis of a mortgage, a sum of Rs. 3,50,500 was payable to the assessed in full satisfaction of the mortgagee's claim. Pending the assessment proceedings, the ITO received information that the mortgagor had paid secretly to the mortgagee a further amount of Rs. 1,50,000 which was not included in the compromise decree. The assessed however, denied having received that amount. The assessment was thereafter completed without including that amount. However, subsequently, the investigation revealed that the assessed in fact received the sum of Rs. 1,50,000. The reassessment proceedings were, thereforee, resorted to. The Supreme Court upheld their validity.
25. In the present cases, there was not even a passing reference made by the ITO at the original assessment proceedings that he had applied his mind and formed any opinion on the propriety of deductions claimed by the assesseds of commissions paid to the Gokulnagar Co. He appeared to have just accepted the disclosure by the assesseds that those payments were towards services rendered as sole selling agents. This material fact which had been ex facie accepted then, was later found to be false. Enough information in this direction was rendered available on the completion of assessments for the years 1951-52 and 1952-53. This could be the basis for commencing reassessment proceedings. In our considered opinion, when the material or primary facts disclosed were themselves false, the provisions of s. 34(1)(a) were attracted. A distinction has to be drawn between falsity of the material facts disclosed by the assessed and the erroneous inference which an ITO may draw from material facts which are otherwise full and true. It is in the latter cases that the courts have come to the view that reassessment may not be permissible as the same would amount to change of opinion. (See in this respect the Supreme Court decision in the case of ITO v. Lakhani Mewal Das : 103ITR437(SC) ).
26. What had happened in the present cases was that the three assesseds had wrongly stated at the original assessment proceedings that Gokulnagar Co., was rendering services as sole selling agents, and, thereforee, was entitled to commissions. Once it was found that this basic material fact had been untruly stated, the entire edifice built thereon had to crumble and for that reassessments were entirely justified. Thus, the Calcutta High Court has in the case of ITO v. Mahadeo Lal Tulsian : 110ITR786(Cal) , observed that the assessed was required not only to make full disclosure of all facts relevant to assessment but also a true disclosure thereof. It was wholly immaterial whether the Income-tax Officer making the original assessment could or could not have found the same to be faked or not. In that case, the assessed had disclosed certain hundi loans and claimed credit for the interest alleged to have been paid on such loans. The ITO accepted the loans as genuine and granted credit for the interest alleged to have been paid on such loans. Subsequently, it was discovered that those loans were not genuine and the assessed had falsely represented them. In the circumstances, recourse to assessment was held permissible.
27. From the side of the assesseds considerable reliance has been placed on a single Bench decision of the Calcutta High Court in the case of Calcutta Credit Corporation Ltd. v. ITO : 79ITR483(Cal) . In that case, the commission was paid to a party known as P.C. & Co., on the basis of certain services rendered. Subsequently, one of the coparceners of P.C. & Co., stated that no business services were rendered. In the circumstances the ITO felt that the assessed had failed to disclose fully and truly all material facts at the original assessment stage. Recourse to reassessment was attempted to be taken but this was not allowed as it was observed that it lay upon the ITO to investigate that claim and find out whether the amount was actually spent for the purpose of assessed's business in order to qualify for allowance. Having made a claim for deduction, it would not be possible nor be the assessed's duty to disclose at the same time that the deduction was not permissible. In our considered opinion, however, this decision does not come to the aid of the present assesseds. As already referred to above, the Supreme Court has in clear terms held in the case of CIT v. T.S.PL.P. Chidambaram Chettiar : 80ITR467(SC) that the mere fact that the ITO could have made further inquiry into the matter but did not do so did not take the case out of s. 34(1)(a).
28. The significant thing to be considered in the present cases was whether the material fact of rendering of services was truly stated by the assesseds at the original assessment proceedings or not. This was found to have been wrongly stated, not, thereforee, could justify recourse to reassessment. We have, thereforee, nothing to differ with the conclusions arrived at by the Income-tax Appellate Tribunal. The question referred is answered in the affirmative. The revenue will be entitled to costs.
29. Before concluding we may also refer to the view taken by the Settlement Commission for the assessment years 1960-61 and 1966-67 in the case of Punjab Sugar Mills Co. Ltd. The assessed has pointed out that the commission had accepted rendering of services by the selling agents for those years. However, the narration of facts brought out by the Settlement Commission shows that it was not brought to its notice that for the assessment year 1951-52, the Tribunal had upheld the disallowance of the commission payment on the ground that no services were rendered by the selling agents. Similarly, it was not laid before the Commission that for the years involved in the present references the commission payments had been disallowed on the some grounds in the course of reassessment. The order of the Settlement Commission for much later years in the circumstances does not come to the avail of the present assesses for the present years.
S. Ranganathan, J.
30. I agree. I would only add that this is not one of those cases where the assessments are sought to be reopened merely because the commission payments were disallowed in a subsequent year without any tangible material to point out incomplete or untrue disclosure of material facts at the time of the original assessment, as was the position in the cases cited on behalf of the assessed. Here, the assessment orders for 1951-52 and 1952-53 show clearly that the ITO came across material which clearly showed that the so-called sub-agents had been appointed by the companies, that their bills had been submitted to the companies and that Gokulnagar had played no part at all. Thus, the officer had reason to believe that income had escaped assessment by reason of the failure of the assessed to truly state the material facts. To say that the jurisdiction to reopen assessment in these circumstances is taken away because the ITO originally accepted the statement of the assesseds would mean that an officer can accept the statements made by an assessed only at his peril and would be unable to reopen the assessment even if the statement is subsequently discovered to be false. This is not the effect of the decisions relied upon by Shri Bishamber Lal. On the contrary Malegaon : 78ITR466(SC) and Chidambaram Chettiar : 80ITR467(SC) show that in cases where material facts are found not to have been fully or truly stated, recourse to section 34/147 is permissible.