The judgment of the court was delivered by
SRINIVASAN J. - The question that stand referred to us are these :
'(1) Whether there were materials for the Tribunals to hold that the dates of delivery on the agreements with G. L. Roche and M. S. Srinivasan and Mahadeva Ayyar aforesaid were within the previous year for assessment year 1946-47 ?
(2) Whether the reassessment under section 34(1)(a) is valid ?'
The assessee, the Modern Theatres Ltd., Madras, is a public limited company producing and distributing films. It entered into several contracts with various distributors and exhibitors on the basis of written agreements with them. For the year ended 30th September, 1945, the previous year to the assessment year 1946-47, the assessee received consideration on the agreements from the various distributors. The assessment proceedings were completed on June 15, 1947. In the year 1954, the than Income-tax Officer submitted a report to the Commissioner of Income-tax. He stated in his report that in the course of the investigation in connection with the assessment for 1950-51, it came to light that although the assessee had effected on outright sale of the distribution rights of the pictures and had also collected in full the sale consideration, the company had spread out the receipts over a period of three to five years on the plea that the distribution rights had been leased out on the basis of annual hire. It was also stated in the report that there had been benami transfers of lease of distribution rights. In relation to the year of assessment 1946-47, the Income-tax Officer also stated that the distribution rights of two new pictures Rajarajeswari and Burma Rani had been sold outright but that only a fifth part of the consideration had been brought to tax. Another instance of such concealment of the true nature of the transaction was, according to the Income-tax Officer, in relation to the transaction with Ganga Films Co. The Income-tax Officer accordingly thought that there had been a suppression of the real income liable to be taxed. He sought the sanction of the Commissioner for re-opening the assessment of the year 1946-47 under section 34(1)(a). The Commissioner granted sanction and thereafter a notice was issued to the assessee. The Commissioner granted sanction and thereafter a notice was issued to the assessee. The notice stated that the Income-tax Officer had reason to believe that the assessees income assessable to income-tax for the year ending 31st March, 1947, had : (a) escaped assessment, and (b) been under-assessed, and the subsequent proceedings resulted in the reassessment of the petitioner. The allegation that there had been benami transactions was however dropped.
The principal basis of the reassessment was that the petitioner had not submitted to tax the entirety of the consideration received by it but had shown only a part thereof. The Income-tax Officer was also of the view that the relevant agreements had not been produced before the officer who finalised the assessment for 1946-47. He repelled the contention that the previous officer had examined the matter in its entirety and had reached a definite conclusion which it was not proper for the succeeding officer to depart from. He also held against the contention of the assessee that the transactions were only agreements of lease of the picture for a certain number of years, that the accounts of the assessee had displayed the entirety of the sums received, that the agreements were in fact produced before the then Income-tax Officer, and held that the assessee had deliberately withheld certain particulars and had not disclosed truly and fully all material facts in the original assessment stage. Held, that the proceedings under section 34(1)(a) were, therefore, not without jurisdiction.
As appeal was taken to the Appellate Assistant Commissioner, who again insisted that 'for the computation of the appellants income, a perusal of the various agreements was necessary. Those agreements were not produced by the appellant before the Income-tax Officer at the time of the original assessment. The case therefore comes under section 34(1)(a).' He, however, made some alterations in the final computation of the income as made by the Income-tax Officer.
There was a further appeal to the Tribunal. In the view of the Tribunal, the assessee did in fact fail to declare the income that must have been legitimately declared and as there had been a concealment and under assessment, the application of section 34(1)(a) was properly invoked.
In its statement of the case, the Tribunal conceded the position that, in the course of the assessment proceedings of the year 1946-47, the then Income-tax Officer did call for copies of the agreements with the lessees in respect of the pictures and that the assessee produced those agreements. The view taken by the Appellate Assistant Commissioner that these agreements were kept back by the assessee accordingly loses its force.
The question stated above were referred by the Tribunal under section 66(1) of the Act. The assessee came before us with an application under section 66(2) of the Act and sought for a reference of a further question. Accordingly to it, in the notice that was issued to it pursuant to the proceedings under section 34(1)(a), only two agreements were referred to and the Income-tax Officer sought to re-open the assessment only on the basis of any suppression of income in relation to these two agreements. But in the final order made by the Income-tax Officer, he included such income in respect of the other agreements as well. The assessee contended that it was not open to the Income-tax Officer to have travelled beyond the scope of the notice issued under section 34(1)(a). On that contention this court directed the Tribunal to refer the following question as well and to submit a consolidated statement of the case. This question is :
'Whether, in any event, the additions made in the aforesaid reassessment in respect of the agreements other than the aforesaid two (the questions of law referred to the High Court and concerned in T. C. No. 145 of 1958, High Court) are legal ?'
This is tax Case No. 120 of 1962.
We may at once dispose of this last question. Mr. Seshadri, learned counsel for the assessee, has not really pressed this question. In any event, it seems to us that when the assessment of an assessee is re-opened under section 34(1)(a), the Income-tax Officer is not limited to any specific allegations of suppression mentioned in the notice. The entire assessment is liable to be re-opened, and it on such re-examination it is seen that, by reason of the failure of the assessee to disclose fully and truly all material facts, any other sums had also escaped assessment, it is within the jurisdiction of the Income-tax Officer to include them as well. This question has accordingly to be answered in the affirmative. But that, we may mention, does not affect the final conclusion in the main case.
The short contention of Mr. Seshadri is that on the finding of the Tribunal that there was no suppression of the agreements, but that, on the other hand, the Income-tax Officer, in order to deal with the assessment for the year 1946-47, called for all the agreements and scrutinised them, it must immediately result in the conclusion that there was no failure on the part of the assessee to disclose fully and truly all the material particulars relevant to its assessment. It is not a case, Mr. Seshadri states, where the agreements as well as other accounts were produced before the Income-tax Officer in the normal course or where such mere course or where such mere production would not have amounted, within the Explanation of section 34 of the Act, to a disclosure. On the other hand, the Income-tax Officer in dealing with the assessment found it necessary to scrutinise the agreements. He specially called for them and they were placed before the Income-tax Officer. If, therefore, the agreements themselves disclose that the assessee had received the full amount of consideration for the leases, and the accounts also displayed receipt of such amounts, there was no failure to disclose any material fact. The then Income-tax Officer must be held to have accepted the position that the assessee was legally entitled to receive only a part of the lease amount during the account year relevant to the assessment year and that the advance receipt of the balance of the amount, for whatever other reasons it might be, was not income referable to that year. Mr. Seshadri urges that the assessee follows the mercantile system of accounting. In such a system, whether the assessee receives any amount or not, if legal right to receive the amount accrues, it is brought in and taxed. Equally, he claims that the receipt in advance of any amount to which he was not entitled in law cannot be brought to tax till the legal right to receive it accrues.
It would be useful to set out the instances of such receipt. In the case of the film Chow Chow under the agreement with the Ganga Films Co., Salem, the assessee received a sum of Rs. one lakh of which it brought only Rs. 15,000 into account. The balance of Rs. 85,000 was recorded in the account books of the assessee under a suspense account. The Income-tax Officer added the sum of Rs. 85,000. The agreement with Ganga Films Company purports to be an agreement of lease. It specifies that the lease is for a period of ten years commencing from March 21, 1945, to March 20, 1955, for a rent of Rs. one lakh payable in ten annual installments commencing from April 9, 1945; the first five installments were to be of Rs. 15,000 each and the second five installments of Rs. 5,000 each. It is in accordance with the terms of this agreement that the assessee became entitled to receive the sum of Rs. 15,000 as the lease amount for the first year. The agreement stipulated the date on which the amount should be paid. Though it is admitted that the assessee received the balance of Rs. 85,000 as well, on the terms of the agreement, the assessee did not become entitled to that amount as the lease amount. That is, in short, the contention of the learned counsel for the assessee, who claims that the lease amount alone can represent the income and that out of the advance left in the hands of the assessee, he was entitled to adjust the annual lease amount as and when it fell due. Till such a right accrued in the assessee, no portion of that amount can be regarded as income assessable to tax. In the case of the films Dawn Bahadur and Burma Rani, which are covered by the agreement with V. L. Narasu, Salem, the agreement was for lease for a period of three years. The rent for each year was to be paid in advance, the dates being October 20, 1944, October 19, 1945 and October 19, 1946. The annual rents were Rs. 10,000, Rs. 12,000 and Rs. 10,000 respectively. Clause 2 of the lease stipulated that the lease was to make a deposit of Rs. 10,000 before talking delivery of the copy of Dewan Bahadur and should make an additional deposit of Rs. 12,000 before taking delivery of the copy of Burma Rani. The lessor was entitled to a first charge over the deposit amounts and to be entitled to adjust them towards the rents payable by the lessee on the respective dates. According to the lessee, only the first payment of Rs. 10,000 became the lease amount liable to be brought in for assessment and the other payments were not lease amounts liable to be so treated. But the Income-tax Officer added the balance of Rs. 22,000 as suppressed income. In the case of the firm Rajarajeswari, under an agreement with Balu & Co., dated December 1, 1944, the lease was for a period of five years and the rent was Rs. 1,25,000 payable in five annual equal installments of Rs. 25,000 on the first of January of every year beginning from January 1, 1945. In accordance with its practice, the assessee brought to tax the sum of Rs. 25,000 being the lease amount for the first year which fell within the account year relevant to the assessment year. The balance of Rs. One lakh has now been added by the Income-tax Officer. According to the learned counsel, in the case of companies like the assessee who produce films, it is the normal practice to demand and accept from persons, with whom leases are entered into, payments in advance which are utilised for the production of films. The parties who pay these advance amounts are entitled to receive copies of the films for exhibition. Mr. Seshadri very pertinently asks what would happen if the films are not produced and the agreements fail. It cannot for a moment be contended that the moneys are not refundable to the lessees, which would hardly fit in with the view of the Income-tax Officer that the amounts represent in their entirety the consideration payable and received during any particular year. It is not the contention of the department that these leases are make believe documents. It is in the very nature of this industry that such arrangements are made, and coupled with the fact that the assessee maintains its accounts in the mercantile system, no objection either in fact or in law can be taken to its bringing into its account as income only that part of the money which represented the lease amount lawfully payable for that year. There is undoubtedly considerable force in this argument.
In Calcutta Discount Co. Ltd. v. Income-tax Officer, their Lordships of the Supreme Court had to examine the correct meaning of the expression 'omission or failure to disclose fully and truly all materials facts', and the nature of the duty imposed on the assessee in this regard. In that case, in the original assessment of a company, profits realised by the company by sale of shares were not assessed to tax. The Income-tax Officer initiated proceedings under section 34 of the Act and when he sought for the Commissioners sanction, he stated that representations made by the company were that the sale of shares were casual transactions. Those representations were accepted then. The companys accounts however showed that it had been carrying a trade in the sale of shares. The Income-tax Officer therefore thought that the company had failed to disclose its true intention behind the sale of shares and on that footing proceedings under section 34 were started. The question was as to what the nature of the duty that lay upon the assessee was, whether what amounted really to an inference to be drawn by the assessing authority from the material facts was a matter which it was the assessees duty to disclose. Their Lordships held that when all the facts which had a bearing on the question whether there was an intention to make a business profit as distinguished from the intention to change the form of the investments were placed before the Income-tax Officer, it was for that officer to make an inference and that the law did not require the assessee to state the conclusion that could be reasonably drawn from the primary facts. The question of the assessees intention being an inferential fact, the assessees omission to state its true intention behind the sale of shares was held not to amount to a failure or omission to disclose any material facts. This decision is of considerable importance as it emphasises the scope of the action under section 34(1)(a). While it is no doubt true that under the Explanation to that section the mere production of accounts and other evidence from which material facts could have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of the section, when, as a matter of fact, all the necessary documents were placed before the Income-tax Officer and the Income-tax Officer himself of his volition called for certain other documents which had a material bearing upon the question which he had to decide, the matter is taken out of the scope of the Explanation. Here is accordingly a case where the Income-tax Officer thought it necessary to determine whether the entire amount received by the assessee was income of that year or only a part thereof notwithstanding that the whole of it had been received by the assessee. But for his need to arrive at a conclusion upon that matter, a scrutiny of the agreements would hardly have been relevant. There is no record in the assessment files relating to the assessee (so we understand) which can show the nature of the use made by the then Income-tax Officer of these agreements and other accounts placed before him. But the circumstances that he called for these importance documents must lead us to the inference that he did so only for the purpose of eliciting the real position, viz., whether only a portion of the amounts received by the assessee should, in accordance with the terms of the lease deed and following the mercantile practice, be regarded as the income of that year. If he did come to that conclusion, there is no doubt that the assessee did fully and truly disclose all the material facts, and the impugned view taken by the Income-tax Officer in reassessing can only be regarded as a change of opinion.
Mr. Ranganathan, for the department, refers to certain observations in his case, where their Lordships deal with the Explanation, and urges that in this case it cannot be taken that by the production of these accounts the assessee had discharged its duty. But we have endeavoured to show that far from being a mere production of the accounts and the agreement, they were in fact called for by the Income-tax Officer, and the only purpose for which they would have been relevant being to discover whether the whole or part of the money was received as income, the very question which forms the basis of the present proceeding under section 34 decided then in favour of the assessee.
For the department, Mr. Ranganathan has referred to the decision in Calcutta Company Ltd. v. Commissioner of Income-tax. In that case, the appellant bought lands and sold them in plots for building purposes. On the sale of plots, only a portion of the purchase price was received, the purchaser undertaking to pay the balance in installments. The appellants in its turn undertook to carry out certain developments within six months. In the relevant accounting year, though the appellant had received only a smaller sum towards the sale price, it credited the entire sale price according to the mercantile system. At the same time, it debited the estimated amount of the cost of improvement, though no expenditure in that regard had yet been incurred. The expenditure was disallowed by the department and that is how the question came before the Supreme Court. Their Lordships held that, since the undertaking to effect improvements involved a liability which accrued on the date of the sale itself, though the liability was to be discharged on a later date, the appellant was entitled to estimate the expenditure and debit the accounts. It was not a conditional liability as contended for by the department. The precise application of this decision is not clear. The learned counsel for the department contends that the converse of the proposition laid down by their Lordships in this case should justify the view that the advance payments should be regarded as income. We are unable to agree. On the other hand, this decision really emphasises the legal incidents of the mercantile system of accounting. We may now refer to two agreements. In the case of the agreement with G. L. Roche, dated May 3, 1945, the lease was for a period of five years in respect of one picture and three years for another. The total rental was Rs. 44,000. The agreement specified that this rent was payable in a certain manner provided therein. On the date of the agreement a sum of Rs. 17,500 paid under an earlier agreement was adjusted towards this lease. A sum of Rs. 25,000 was paid on the date of the lease. It was also stipulated that the balance of Rs. 1,500 was to be paid within three months from that day. It is not denied that the entirety of this sum of Rs. 44,000 was received in that manner. Both the right to receive the amount for the entire period of the lease and the actual receipt itself appear to have been within the year of account which ends with the 30th September of the year. Strictly speaking, therefore, this amount should have brought in as taxable income for the year in question. But this was not done at the time of the original assessment. In a like manner, in respect of the agreement dated September 2, 1945, with M. S. Srinivasan relating to the picture Rajarajeswari, the lease was for a period of five years and the rent fixed was a total sum of Rs. 25,000. A sum of Rs. 20,000 was stipulated to be paid on the signing of the contract and the balance of Rs. 5,000 to be adjusted from the collections. When the balance was received is not clear. But it is obvious that out of the total lease amount of Rs. 25,000, the assessee became entitled to receive the sum of Rs. 20,000. The date on which this right accrued being the date of the agreement, this amount should have been taken as part of the income of year.
In these two cases these sums were omitted at the time of the original assessment, apparently for the reason that the right to receive the amount was coupled, in a manner of specking with the supply of the copy or copies of the picture. It seems that the assessee did not supply the copies of the picture before the close of the account year and since the supply was made only in the following account year, it seems to have been assumed both by the assessee and by the assessing officer that the amount, though received in the account year, was liable to be brought in for purpose of tax only on the supply of the films, which took place in the following account year. That view is obviously incorrect, for the failure to supply the films might give rise to some other cause of action between the parties to the agreement. The right to receive the amount had accrued to the assessee during the account year in question and, since it is the mercantile system that is being followed by the assessee, these amounts should have been brought to tax.
Notwithstanding these features, however, it is not open to the department, in the light of what we have stated earlier, to bring these amounts to tax in section 34 proceedings. The assessing authority, when he made the assessment, took a particular view of the legal liability of the assessee to be assessed in respect of these amounts, and since there was no default on the part of the assessee or failure to disclose truly and fully the state of things, section 34(1)(a) cannot apply. We have, nevertheless, thought it fit to refer to this part of the original proceeding to indicate the nature of the rights and liabilities of the assessee.
It should follow from what we have stated that the circumstances do not warrant the view that the assessee has failed to disclose fully and truly all the material facts necessary for the assessment. On the facts also, the proper inference in law to be made would be that the entire amount did not represent the income of the assessee during the year. The reassessment made in these circumstances cannot be supported. Both the question are answered in favour of the assessee, who will get his cost from the department. Counsels fees Rs. 250.
Question answered in favour of the assessee.