D.K. Kapur, J.
1. At the instance of the assessed, the Income-tax Appellate Tribunal has stated a case regarding the following question for the assessment year 1964-65 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that reopening of the assessment for the year 1964-65 under section 147(a) of the Income-tax Act, 1961, was valid ?'
2. It is useful to summarise the fact set out the statement of case. For this assessment year, the assessed had returned an income of Rs. 7,42,278, which was revised to Rs. 7,41,017, and the assessment was completed in the ordinary course on a total income of Rs. 7,42,978. The assessment was reopened under section 147(a) of the Income-tax Act, 1961, on March 23, 1973, on the ground that the assessed had transferred its profit to others. A profit of Rs. 3,13,895 was transferred to M/s. Cosmos Traders, a proprietary concern of Shri Arun Kumar Goyal, son of the assessed's managing director and a profit of Rs. 3,58,172 was transferred to M/s. Rengo Farms (P) Ltd., a family concern of the managing director. The ground for reopening the assessment was that the assessed-company had not disclosed fully and truly all the material facts necessary for assessment. The Income-tax Officer rejected the contention that the proceedings could not be reopened under section 147(a) and he computed the income in reassessment at Rs. 14,15,045.
3. The assessed appealed to the Appellate Assistant Commissioner again contending that the assessment could be reopened under section 147(a). It was pointed out that the agreements between the assessed and M/s. Cosmos Traders and that between the assessed and M/s Rengo Farms (P) Ltd. were filed in the original proceedings along with the return. The Appellate Assistant Commissioner held that the assessment could be reopened, but he otherwise set aside the assessment with the direction to reframe the same after full and proper enquiries and allowing the assessed a reasonable opportunity of being heard. The assessed in further appeal before the Tribunal raised the question that the proceedings under section 147(a) were vitiated and, hence, the Appellate Assistant Commissioner should have annulled the assessment. The Tribunal was of the view that M/s. Cosmos traders and M/s. Rengo Farms (P) Ltd. were concerns of close relatives of the managing director was material which was not disclosed in the original assessment proceedings.
4. It is useful to note the material points on fact which were relevant according to the Tribunal. The assessed runs a piggery with a factory at Mehrauli. Pigs are slaughtered and pork and other meat products a manufactured and sold. The assessed obtained a contract for supplying canned mutton to the defense Department at certain specified rates. For this purpose, agreements were entered into with M/s. Cosmos Traders for a part of the year and M/s. Rengo Farms (P) Ltd. for a subsequent period.
5. According to the Tribunal, the rates at which these firms had to supply were not much lower than the rates at which the defense Department was to buy the canned mutton. But these two firms entered into agreements with a butcher for supply of mutton at still lower rates. M/s. Cosmos Traders was a proprietary concern of Shri Arun Kumar Goyal, son of the managing director of the assessed-company and M/s. Rengo Farms (P) Ltd. is also a family concern of the managing director. According to the Tribunal, these two firms earned considerable profits, which would otherwise have been enjoyed by the assessed-company. The undisclosed fact, according to the Tribunal, was the fact that these two concerns were intimately connected with the managing director of the assessed-company. In the original proceedings, the Income-tax Officer had considered the assessed's agreements with M/s. Cosmos Traders and M/s. Rengo Farms (P) Ltd. as genuine and accepted the accounts without making a further enquiry. thereforee, the main point was that there was an escapement of income because the assessed had not fully and truly disclosed all the material facts necessary for making the assessment.
6. Before us, learned counsel cited numerous judgments regarding the jurisdiction to reopen the assessment proceedings under section 147(a) of the Income-tax Act, 1961. We have considered various aspects of the case. The material question : Can the income of M/s. Cosmos Traders and M/s. Rengo Farms (P) Ltd. be considered to be the diverted income of the assessed-company The two amounts in question are over Rs. 3,00,000 each. The simple facts were that the assessed-company got a contract to supply canned mutton whereas its normal business was to run a piggery and to supply meat products from that piggery. It was, in a sense, a new line for the assessed-company which appeared to have previously specialised in pork products. Inasmuch as the canned mutton had to be obtained from other sources, the assessed-company could have employed its own staff but, instead, it chose to have first an agreement with M/s. Cosmos Traders, which was a proprietary firm of Shri Arun Kumar Goyal, son of Shri R. N. Goyal, the managing director of the assessed-company. The other company, M/s. Rengo Farms (P) Ltd., was itself a company. On a closer examination of the facts, we found that both there firms had also been assessed, so we were interested to enquire as to what income had escaped assessment.
7. On this aspect of the matter, the proposition may be stated as follows. If the entire income of M/s. Cosmos Traders as well as M/s. Rengo Farms (P) Ltd. is clubbed with the assessed, the taxable income rises from Rs. 7,42,978 to Rs. 14,15,045. As companies are taxable at a standard rate, we have been unable to discover how the realisation of tax is increased by taxing the assessed instead of M/s. Rengo Farms (P) Ltd. The tax (rate) being the same, the alleged diversion of income does not affect the revenue at all. If we take the income attributable to M/s. Cosmos Traders amounting to Rs. 3,13,895, the case becomes even clearer. In such a case, if this is a proprietary concern, the rate of tax is much higher in the case of that individual than it is in the case of the assessed-company and so there will actually be a greater payment of tax. We have, thereforee, not been able to find out in what way the revenue had lost and in what way has the assessed gained.
8. The reasons stated by the Income-tax Officer are set out in the Income-tax Officer's order. They are as follows :
'The assessed has income from sale of piggery products. During the previous year relevant to the assessment year 1964-65, the assessed-company secured a heavy contract for supplying chilled mutton to the defense Department. For this supply, the assessed-company gave sub-contract to M/s. Cosmos Traders, whose proprietor was Shri Arun Kumar Goyal, son of Shri R. N. Goyal, managing director of the assessed-company. who was the virtual owner of Essex Farms (P) Ltd. From enquiries, it was revealed that Shri Arun Kumar Goyal was a student when the contract was executed between the assessed-company and M/s. Cosmos Traders. It has also been noticed that M/s. Cosmos Traders entered into an agreement with one Mirza Munir Beg to purchase and supply raw mutton on commission basis. All this shows that the assessed-company diverted its own profits to avoid proper taxation in its hands. In this connection, it is pointed out that the Income-tax Officer, District II, Ward A, has framed the assessment for the year 1964-65 of Shri Arun Kumar Goyal at Rs. 3,01,658 as a protective one. thereforee, I have reasons to believe that due to failure on the part of the assessed to disclose fully and truly all material facts relevant to the assessment year in question, income to the extent of Rs. 3,00,000 has escaped assessment. Necessary permission to reopen the assessment for the assessment year 1964-65 may kindly be granted under s. 147(a).'
9. This passage shows that Shri Arun Kumar Goyal was a student and, thereforee, there was a diversion of income. On the other hand, it also shows that Shri Arun Kumar Goyal was assessed on an income of Rs. 3,01,658, which supports the view that actually the Revenue has gained from the alleged diversion. Finally, it is noteworthy that the last part of the quoted reasons states that income to the extent of Rs. 3,00,000 has escaped assessment. We asked learned counsel for both parties to explain how the income had escaped assessment when it was assessed in the hands of both M/s. Rengo Farms (P) Ltd. and Shri Arun Kumar Goyal, as a proprietor of M/s. Cosmos Traders.
10. We granted an adjournment to the parties and neither counsel could show that there had been actually any reduction in the taxable profits.
11. On a proper appreciation of the facts of this case, it appears to us that the assessed is a private limited company and M/s. Rengo Farms is also a private limited company. It was open to the proprietors of M/s. Essex Farms (P) Ltd. to set up another private limited company in order to deal with the mutton business. This is a legitimate business operation which cannot be described as being a method for evading tax because the tax in any case on both the companies is at the same rate.
12. We feel that the Income-tax Department hag been unnecessarily suspicious of what appears to be a legitimate transaction which does not lose anything in Revenue because the tax realised, if anything, is more and not less.
13. At the same time, though we do not want to comment on the nature of the transaction, it must be kept in view that the assessed was dealing only in piggery and pork products, when it entered into the contract to supply goat meat. The nature of the work to be done for the defense Department is disclosed in a note which is reproduced in the Appellate Assistant Commissioner's order. It states as follows :
'For the purpose of supplying to the defense Department, the company purchased dressed meat from Cosmos Traders for a part period and from Rengo Farms Private Ltd., for a certain part of the period. According to the agreement with the Government, the company had to supply from time to time various quantities at certain agreed rates. The company entered into an agreement with Cosmos Traders and later with Rengo Farms (P) Ltd. for ensuring the supply of sheep and goats. As the entire manufacture was to be under the supervision of the Government officials, live goats were purchased by Cosmos Traders and supplied to the company These live goats were examined by the veterinary doctor and passed fit before they were slaughtered by the company at its factory. Under the contract with Cosmos Traders and Rengo Farms Private Ltd., though live goats were supplied, the payment for supply of mutton by Cosmos Traders and Rengo Farms Pvt. Ltd. were on the basis of dressed chilled meat. These were later on processed, canned and supplied to the defense Department. This is an additional activity of the company in the year under consideration.'
14. thereforee, the function of M/s. Cosmos Traders and M/s. Rengo Farms (P.) Ltd. was restricted to getting supply of live goats which were slaughtered in the company's factory and converted into mutton for supply to the defense Department. The work of procuring the goats for slaughter was a function performed by these two firms. No doubt, these goats had to be purchased from some butcher, but they had to be of a particular quality, as the defense Department had to examine them through veterinary doctors. As far as pigs were concerned, the assessed had its own piggery, but as far as the supply of mutton was concerned, it had to get the goats from somewhere. It is, thereforee, not altogether unusual to get the services of somebody else. Prima facie this does not seem to be only diversion of profits, but appears to be payments for the work of getting goats in good condition and for supply of pork to the defense Department. Such work would require some initiative and considerable amount of time.
15. These facts are only set out to show the nature of the transaction but, this case has to be decided on the question whether the conditions of section 147(a) are satisfied. That section operates in two particular cases - either there has to be an omission or failure on the part of an assessed to make a return or, there has to be a failure to disclose fully and truly all material facts necessary for assessment. According to the Department, there was a failure to disclose the relationship between M/s. Essex Farms (P.) Ltd. and M/s. Rengo Farms (P) Ltd., which are both private limited companies. There is also a failure to disclose that the proprietor of M/s. Cosmos Traders, Shri Arun Kumar Goyal, is the son of Shri R. N. Goyal, managing director of M/s. Essex Farms (P) Ltd. But the principal point in section 147(a) is that income chargeable to tax must have escaped assessment in that year. In other words, if there is a failure to file a return but there is no escapement of tax or, there is failure to disclose material facts but there is no escapement of tax, the section does not operate. The section operates only if by reason of the failure to file a return or a failure to disclose fully and truly all material facts, there is an escapement of tax. As pointed out earlier, in this case, there is no escapement of tax because the tax has been imposed on M/s. Rengo Farms (P) Ltd. and on M/s. Cosmos Traders and the tax which is chargeable from these two entities is either the same or more and not less. So, there is no escapement of tax. Hence, one of the essential ingredients of section 147(a) is not satisfied and the provision was not available for reopening the assessment.
16. In the peculiar circumstances of this case, which in this sense are somewhat unusual, the answer to the question referred to us would be in the negative as we come to the conclusion that the reopening of the assessment was not valid.
17. As the answer to the referred question is based on the peculiar facts of this case, we leave the parties to bear their own costs.