9. The assessee-company carries on business in sale of dye stuffs and chemicals in India. Besides, it receives income being interest, royalty, technical fees and dividends from the Indian Cos. For this year it has filed a return of income admitting a total income of Rs. 1,08,90,033. In response to the notice Under Section 143(2), Shri Gangadharan of the Co. was present. I have discussed the case with him.
2. During the year of account the company received the following amounts as interest from I.C.I. (India) Pvt. Ltd. :
(a) Rs. 5,50,000 being interest on the loan advanced by the assessee-company for the purpose of purchase of shares in M/s. Atic Industries Ltd. by I.C.I. (India) Pvt. Ltd.
(b) Interest on current account : Rs. 43,624.
(c) Rs. 9,62,515 being interest on the loan advanced for purchase of shares in Alkali and Chemical Corporation of India Ltd.
10. The company has filed tax deduction certificates in respect of the above three items of interest issued by the paying company, viz., M/s. I.C.I. (India) Pvt. Ltd. However in the return of income filed, it has admitted only the first two items of interest receipts totalling Rs. 5,93,624. The sum of Rs. 9,62,515 being the interest received on account of the A.C.C.I. loan has not been admitted by. the company. It is claimed by the company that the loan in respect of which the interest of Rs. 9,62,515 is receivable by it was advanced for the specific purpose of purchase of shares issued by M/s. Alkali & Chemical Corporation of India Ltd. The interest payable by I.C.I. (India) Pvt. Ltd. was made conditional on the fact of the latter company earning dividend in respect of the shares..............
11. The claim of the company that the interest payable on the loan was conditional on the Indian Co. earning dividend income is not borne out by the entries made in its books of accounts. As already pointed out above the interest has been claimed by the Indian Co. even before the fact of any dividend.
12. It is admitted that the loan came to be repaid only by transfer of shares and such transfer of shares took place after 30-9-60. Therefore, for the period ended 30-9-60, the London Co. is entitled to receive the interest and hence is assessable on the same.............
1. The total income and tax payable is determined as under:
(1)Business income as returned 24,54,479(2)Other sources (a)Dividend from Co. 60,63,686 Tax Credit : I.T.10,99,096.14 S.T. 3,00,000.00 (b)Technical fees as admitted 2,32,608 Tax Credit : I.T. 46,539.37 S.T. 1,00,059.65 (c)Royalty 15,45,436 Tax Credit : I.T. 3,09,087.64 S.T. 6,64,537.21 (d)Interest 15,56,139 Tax Credit : I.T. 3,11,226.00 S.T. 6,69,139.00
13. Then in respect of the assessment years 1962-63, and 1963-64, it appears from a letter dated the 27th of July, 1965, that the said Mr. N.L. Gangadharan, the representative of the appellant, had discussion with the Income-tax Officer, inter alia, in respect of the said transaction of loan. A copy of the said letter would appear at page 45 of the additional paper book and is set out below:
27th July, 1965.
The Income-tax Officer,
Companies District IV,
P-7, Chowringhee Square,
Imperial Chemical Industries Ltd. London
1962/63 & 1963/64, assessments.
We refer to the discussion the undersigned had with you in connection with the above assessments of I.C.I. Ltd.
1. We enclose extracts from the minutes of the meeting of the board' of directors of I.C.I. (India) held on 27th March, 1957, and 30th September, 3958, wherein the rate of interest payable on loan of Rs. 180 lakhs from I.C.I. was approved at 11/2% above the Indian bank rate with a minimum of 5% per annum.
2. The research contributions payable by Atic were in the nature of contributions towards the research expenditure incurred by I.C.I. and, therefore, the Rolls Royce Ltd. v. Jeffrey (Inspector of Taxes) case does not have any relevance to the subject.
for Imperial Chemical Industries Ltd.
for I.C.I. (India) Private Ltd., Agents.
for Chief Accountant.'
14. Another letter dated the 2nd of August, 1965, in respect of the assessment of the appellant for the year 1962-63, to the Income-tax Officer inwhich it is recorded that there was telephonic discussion between the saidN.L. Gangadharan and the Income-tax Officer in connection with the saidassessment year relating to the transfer of the shares. The said letter is atpage 47 of the additional paper book and is set out hereunder :
2nd August, 1965.
The Income-tax Officer,
Companies District IV,
P-7, Chowringhee Square,
Imperial Chemical Industries Ltd.
You reefer to the telephonic conversation our Mr. N.L. Gangadharan had with you in connection with the above assessment and we confirm having advised you :
1. That the ordinary shares in Indian Explosives Limited which were held by I.O.I. (India) Private Limited on behalf of Imperial Chemical Industries Limited were transferred to Imperial Chemical Industries Limited on 23rd February, 1961.
2. That the details of interest exempt from tax under Section 10(15)(iv)(c) received by Imperial Chemical Industries, are as under :
The Alkali & Chemical Corporation od India Ltd.
Exempt from tax vide Government of India's letter dated 26-11-59 forwarded to you under cover of our letter dated 15-7-65 (enclosure G). 4,565Exempt from tax vide. Government of India's letter dated 9-7-58 forwarded, to you. under cover of our letter dated 15-7-65(enclosure H).12,622Indian Explosives Limited.Exempt from tax vide Government of India's letter dated 19-12- 58 forwarded to you under cover of our letter dated 15-7-65 (enclosure I).13,040
For Imperial Chemical Industries Ltd.
For I.C.I. (India) Private Ltd., Agents.
(Sd.) B. P. Palit,
Chief Taxation Officer. '
15. From those correspondences and the assessment order dated the 29th of May, 1965, it is clearly and' conclusively established that the Income-tax Officer concerned had discussions about the nature of the transaction of the said transfer of shares to the appellant by I.C.I. (India). And the interest paid by the I.C.I. (India) Ltd. on the basis of declaration of dividend by the said three companies, were taxed under the heading 'Other sources'. Therefore, by no stretch of imagination it can be alleged that the appellant did not disclose all the relevant facts including the memorandum and articles of association and the nature of the transaction which ultimately resulted in the transfer of the shares of the three companies being A.C.C.L Ltd. I.E.L. Ltd. and Atic Ltd. by the I.C.I. (India) Ltd. on the respective dates which have been mentioned earlier. The assessment of the appellant for the assessment year 1962-63 was completed on the 27th of July, 1965, which was served on the appellant on the 7th of August, 1965. The letters dated the 27th July, 1965, and 2nd of August, 1965, have already been set out before, which clearly record the fact of discussion between Mr. N.L. Gangadharan, the appellant's representative, with the Income-tax Officer concerned regarding the said loan transactions leading to the transfer of the said shares under the arrangement.
16. Thereafter, another chapter was opened by the Income-tax Officer by successive notices being served, the first was on the 29th of March, 1967, being the notice under Section 16(1) of the Gift-tax Act issued by the Gift-tax Officer, 'B' Ward, Companies District IV, to I.C.I. (India) Ltd. asking it to submit the return of gift alleged to have been made by the said I.C.I. (India) Ltd. in the assessment year 1962-63, being the transfer of the shares in the said three companies being A.C.C.I. Ltd., I.E.L. Ltd. and Atic Ltd. to the appellant otherwise than for adequate consideration. The said notice is set out at page 304 of the paper book in this appeal.
17. It is not necessary to go into the details of the various stages of the said proceedings which started with the said notice under the Gift-tax Act. The Income-tax Officer assessed the I.C.I. (India) Ltd. for the assessment year 1962-63, pursuant to the said notice by his order dated the 30th of March, 1967, and the said order of the Income-tax Officer was set aside by the Appellate Assistant Commissioner of Income-tax by his order dated the 18th of October, 1967. From the said order of the Appellate Assistant Commissioner, the income-tax authorities preferred an appeal to the Income-tax Appellate Tribunal which by its elaborate and well reasoned order rejected the said appeal on the 19th of February, 1969. The income-tax department made an application under Section 256(1) of the Income-tax Act, 1961, for reference to be made to this High Court which was rejected by the Tribunal on the 28th of July, 1969. On the 8th of September, 1970, an order was made by this High Court directing the Tribunal to refer certain questions of law in respect of the said appeal of I.C.I. (India) Ltd. for the assessment year 1962-63, relating to the alleged sale of the said shares to I.C.I., London, that is the appellant. Ultimately, on the 20th of January, 1972, the appeal preferred by the I.C.I. (India) Ltd. against the order made by the High Court dated the 8th of September, 1970, was allowed by the Supreme Court of India upholding the decision of the Tribunal and also with the observation about the correctness of the finding of facts as to the nature of the transaction involving the said transfer of the shares by the I.C.I. (India) Ltd. to the appellant. The finding on basis of primary fact as to the nature of the transaction by the Tribunal was affirmed by the Supreme Court in the said proceeding. In any event, the Tribunal was the final judicial authority on facts.
18. During the course of the said independent proceeding regarding the income-tax, against the I.C.I. (India) Ltd., that is, the appellant's hundred per cent. subsidiary relating to the said transfer of shares in the three companies under the arrangement of the loan and advances pursuant to the declaration of intention dated the 5th of November, 1963, all of which have been referred to earlier, another parallel proceeding was started against the appellant which has ultimately given rise to this appeal. That was the first notice under Section 148 of the Income-tax Act, 1961, served on the appellant for reopening the assessment of the appellant for the assessment year 1962-63. The alleged reason for such reopening as recorded by the Income-tax Officer for issuing the said notice under Section 148 dated 23rd of September, 1968, is at pages 49 and 50 of the additional paper book wherein it is, inter alia, alleged that the appellant has made a profit of about Rs. 14,40,62,901 as a result of the said transfer of shares in the three companies by the I.C.I (India) Ltd. in repayment of the loan advanced from time to time at face value of the shares. It is alleged that the appellant should have declared the said amount being the difference between the market price and the face value of the said shares in the said three companies as its profits and due to such failure the income has escaped assessment for the year 1962-63, of the appellant. Pursuant to the said 1st notice dated the 23rd of September, 1968, the appellant, after asking for the reasons for such reopening of the assessment for the assessment year 1962-63, which was supplied in due course by the income-tax authorities (sic) the appellant was also served with the notice under Section 143(3) of the Income-tax Act, 1961, by respondent No. 1, for production of documents and evidence pursuant to the return filed by the appellant. It may be mentioned, that by a letter dated the 17th of October, 1968, the appellant, inter alia, protested against the said reopening of the assessment for the assessment year 1962-63 of the appellant on the ground that the conditions precedent to take action under Section 147 of the Income-tax Act, 1961, are not satisfied in this particular case and the notice under Section 148 was without jurisdiction and ought to have been withdrawn and without prejudice the appellant filed a return disclosing the same income which resulted in the assessment order dated the 27th of July, 1965. The Income-tax Officer who is now one, Mr. S. Raman, by a letter dated the 13th of November, 1968, fixed the hearing of the appellant's case pursuant to the said notice under Section 148 of the Income-tax Act, for the assessment year 1962-63 on the 2nd of December, 1968, at 11 a.m. and the appellant was also requested in the meantime to furnish an attested copy of the memorandum and articles of the association of the company and a world balance-sheet for the assessment year 1962-63. Pursuant to the said notice the appellant on the 11th of December, 1968, duly furnished the copies of the world balance-sheet, articles of association and memorandum of the appellant to the Income-tax Officer. Thereafter, it appears that nothing happened in respect of the proceeding under Section 148 of the Income-tax Act, pursuant to the said first notice dated the 23rd September, 1968, served by respondent No. 1, on the appellant. Then suddenly on the 7th May, 1970, the respondent No. 1, informed the appellant that the proceedings under Section 148 of the Income-tax Act, 1968, for the assessment year 1962-63, consequent to the said 1st notice dated the 23rd of September, 1968, were dropped. It appears that immediately on the next day, i.e., on the 8th May, 1970, the Income-tax Officer recorded his reasons for issuing another notice which may be called the second notice under Section 148 of the Income-tax Act, which is the subject-matter of challenge in this appeal. The said reasons would appear at pages 51-53 of the additional paper book which, in substance and effect, are the same reasons for escapement of the income resulting from the alleged profit made by the appellant by the transfer of the shares in the three companies at par value being the exact amount of alleged profit under the previous notice. Only with the additions of grounds that, under Clause 4(1) of the memorandum of association, the appellant was carrying on business as capitalist and financier of associated companies and as such the appellant should have shown the interest received from the loan as income from interest and net income from other sources. It was further stated that the difference between the market price and the face value of the transfer of shares represented the business profit and has not been shown as such, and thirdly, the appellant did not file the memorandum, articles of association and the world balance-sheet at the time of original assessment for the year 1962-63, before the Income-tax Officer and, therefore, the appellant was guilty of failure to disclose all the said primary facts of the appellant's business income to the extent of the said sum of Rs. 14,40,62,901 which has escaped assessment being the identical figure of the first notice. Thereafter, on the 20th of May, 1970, the present impugned notice under Section 148 of the Income-tax Act, 1961, was issued to the appellant and, after several correspondence regarding disclosing the reasons of such reopening which the respondents refused to do, on the 7th of July, 1970, the respondent No. 1 served the other two notices under Section 142(1) and Section 143(2) of the Income-tax Act, 1961, to the appellant for proceeding with the said notice dated the 20th of May, 1970. On the 14th of September, 1970, representations were made by the appellant to the Central Board of Direct Taxes against the said impugned notices under Sections 148, 142(1) and 143(2) being dated the 20th of May, 1970, and 7th of July, 1970, respectively. It appears that on the 26th of December, 1970, and 29th of January, 1971, the Income-tax Officer fixed the date of hearing pursuant to the said impugned notices and adjournment was asked for by the appellant of the proceedings till the decision of the Central Board of Direct Taxes. On the 5th of April, 1971, the Central Board of Direct Taxes informed the appellant that the Board declined to interfere in the matter. Thereafter, the appellant served a letter demanding justice on the 28th of May, 1971, and on the 11th of June, 197J, filed the writ petition challenging the said impugned notices in this High Court.
19. A.K. Sinha J., issued the rule nisi and restrained, the respondents for a period of eight weeks in the first instance from proceeding with reassessment for the assessment year 1962-63, in pursuance of the said impugned notices and taking further steps in pursuance thereto and liberty was given to the appellant, to make fresh application for extension of the interim order with notice to the respondents. The said rule is at pages 388-391 of the paper book. It appears that the appellant, by a petition dated the 16th of July, 1971, moved for extension of the interim injunction and the respondents filed their affidavit-in-opposition on the 26th of August, 1971, and the affidavit-in-reply in the said application was filed by the appellant on the 27th of November, 1971. Finally, the rule was heard by Ghose J. and by the judgment and order appealed from, passed on the 10th of September, 1973, the rule nisi was discharged and operation, of the order was stayed for four weeks after the long vacation of 1973. The appellant preferred this appeal on the 19th of September, 1973, and the stay was continued till the disposal of the application before the appeal court constituted by B.C. Mitra and A.K. Janah JJ.
20. From the above facts it appears that the appellant's transaction was under the arrangement and agreement which was arrived at and recorded between the Government of India, the appellant, i.e., I.C.I. London and J.C.I. (India) Ltd., by the declaration of intention dated the 5th of November 1953, relevant portion of which has been set out before. Loans and advances were made by the appellant from time to time, to the I.C.I. (India) Ltd., its hundred per cent. subsidiary for requisition of the shares of the said three companies, viz., A.C.C.I. Ltd., I.E.L. Ltd. and Atic Ltd., and finally, the said shares were recalled in repayment of the loans and advances made by the appellant under the said arrangement and agreement from diverse dates in 1961, as has already been stated before. The said recalling of loans and advances by transfer of the shares of the said three companies by the I.C.L (India) Ltd., to the appellant have given rise to several proceedings first for capital gains tax against the I.C.I. (India) Ltd., which ultimately failed. Simultaneously, for proceeding against the appellant for reopening the assessment for the assessment year 1962-63, the first notice was issued on the 23rd. of September, 196X, and after proceeding with the same it was suddenly dropped on the 7th of May, 1970, and immediately thereafter the second notice was issued followed by consequential notices which are the subject-matter of challenge in the writ petition filed by the appellant. It is admitted that the gift-tax proceeding against the I.C.I. (India) Ltd. in respect of the same transact ion is now pending. It appears that the nature of the transaction involved in this appeal which has been finally concluded by the Supreme Court affirming the Tribunal's finding which is the fact finding authority in respect of Section 52 of the Income-tax Act proceeding against the I.C.I. (India) Ltd. would appear from the relevant portions of the order of the Appellate Tribunal, copy of which is in the appeal paper book, at pages 245-274. After discussing and analysing the facts leading to the said transaction between I.C.I. (India) Ltd. and the appellant, the Tribunal in paragraph 20 at page 258 of the paper book gave its finding as to why the appellant entered into the said arrangement of purchasing the shares of the three companies through its hundred per cent. subsidiary by advancing loans from time to time. The said paragraph 20 is set out hereunder :
'20. We may briefly explain why I.C.I. wanted to have the shares held in the name of the assessee before being 'taken over' by I.C.I. Section 15C gave relief from income-tax in respect of dividends from new undertakings and Section 56A gave relief from super-tax on dividends from companies carrying on manufacture of particular items set out therein. As I.C.I is a U. K. company, it would be assessable in U. K., on its income including the dividends from India, if it held the shares directly. The relief under Sections 15C and 56A would be of no use to it as the dividends which got relief from tax in India would be fully taxed there. The double or unilateral reliefs granted in U. K. would not he also of help as in India it would have paid less tax and the U. K. rates would be higher. The result would have been that the tax at the U. K. rate, which would in the context, be higher would have been payable on the Indian dividends. It is this aspect which ultimately led to its suggestion that the assessee should hold the shares, the necessary finance being found by I.C.I. The above background would show that the idea was not to make the assesses the real beneficial owner of the shares. The fact that the shares should be held only for a time beneficially by the assessee is clear from the 'declaration of intention' dated 5th November, 1953.'
21. Then at pages 261-262 of the paper book in paragraph 30 the Tribunal, after discussing the arguments and the facts, held as follows :
'.........Taking this along with the minutes of the meeting with the officials of the Government of India in October, 1953, it is clear that the whole idea of I.C.I. throughout was to make some funds available to the assessor, so that the shares could be acquired in its name and that the shares could be transferred to I.C.I. as and when it demanded. The earliest expression that is used is 'take over'........In our opinion the very words 'takeover' in the context of the relationship between the assessee and I.C.I. go to show that the idea was to take back the shares in discharge of the loan. Otherwise, there was no need to mention to the officers of the Government of India as early as October, 1953, that the assessee wanted to have the shares held by the Indian company so as to get the benefit of Section 15C and Section 56A. The mention of this aspect goes to show that the assessee would have subscribed for the shares by itself but for the fact that it did not want to lose certain benefits under Sections 15C and 56A if it directly held that shares. Even if it be a transaction between the principal and the subsidiary--the subsidiary was doing well in India it would be too much to expect that the I.C.I. should have given interest from lease (sic) so as; to enable the assessee not only to earn dividends and retain the amounts but also to take advantage of any increase in prices. Taking into account the correspondence and the documents which we have referred to earlier, we are satisfied with the assessee's case that the transfer of shares to London at issue price at par was throughout the basis of the advance of loan to the assessee.'
22. Then, again at page 265 of the paper book, paragraph 34, the Tribunal observed as follows :
'.........We have to find out the object of the transaction. It is removed in point of time from the result. In such a case one cannot try to infer the object. from the results. We really have to put ourselves at a point of time when the transaction was conceived. Taking the result would be to project the enquiry to a different point of time, i.e., when the result is realised. This would be wrong and contrary to the statutory postulates. Taking the materials before us, we consider that there is nothing to suggest that the parties had the capital gains tax in their mind in 1957 and later when they put through the aforesaid transactions. We have, therefore, to hold that the factual requisites of Section 52 have not been established here.'
23. Then again in paragraph 35, at page 265 of the paper book, the Tribunal observed as follows :
'.........The arrangement between the parties was also recorded in a minute of the assessee-company on 9th December, 1968. It is true that the transaction was put through after the capital gains levy was revived. However, that by itself is not enough to show that the whole transaction was conceived with the object of avoidance or reduction of liability to capital gains tax. The whole scheme is the same as for the sum of Rs. 160 lakhs. Whatever we have state earlier would apply to this case also.'
24. Then again in paragraph 36, at pages 265-266 of the paper book, the Tribunal observed' as follows :
'36. It remains for us to deal with the transaction relating to the shares in the other two companies. The scheme for manufacturing polythene by A.C.C.I. was placed before the Government of India, by a letter of the assessee dated 13th December, 1965, addressed to H. V. R. Iyengar, Secretary, Ministry of Commerce and Industry. In paragraph 7 of the annexure to that letter it was specifically stated that to enable the assessee to subscribe for the new shares, I.C.I. would lend the subscription monies to the assessee on the understanding that at a later date I.C.I. could acquire at the issue price, these new shares in satisfaction of its loan. In the application to the Controller of Capital Issues it was mentioned (page 176 of book I) that the assessee has undertaken to subscribe at the issue price for the new shares to be provisionally allotted to the assessee strictly in accordance with its present shareholding. It is also mentioned that the share could be acquired at the issue price by I.C.I.' The Tribunal after dealing with the arguments on behalf of the income-tax authorities and also the facts at page 269 of the paper book paragraph 40 held as follows :
'40. In paragraph 53 of the Appellate Assistant Commissioner's order, the Appellate Assistant Commissioner has referred to three affidavits. He has also mentioned that the department had not cross-examined the deponents. He took the statements in the affidavits as correct. Before us, the learned counsel for the department stated that he accepted the affidavits as correct in so far as the facts were concerned and he disputed only the inference therefrom. In our opinion, if the facts mentioned therein are taken as correct, the inference that the transaction was not for the purpose of avoiding or reducing liability to capital gains tax has to follow......'
25. It is true that the question before the Tribunal was whether Section 52 of the Income-tax Act, 1961, was attracted in relation to the said transaction of advancing loan by the appellant to its hundred per cent. subsidiary, I.C.I. (India) Ltd., who was the assessee in the said proceeding before the Tribunal and acquired the shares of the said three companies, viz., A.C.C.I. Ltd., I.E.L. Ltd. and Atic Ltd. out of the loans advanced by the London company from time to time and finally transferred the said shares at par to the London company pursuant to the said agreement and arrangement between the parties concerned. The Tribunal held on findings on the basic nature of the transaction and the intention of the parties which was quite open and clear by virtue of correspondence and particularly the declaration of intention dated the 5th of November, 1953, which has been mentioned earlier that the provisions of Section 52 of the Income-tax Act had no application to the facts which resulted in the said transaction of transfer of shares at par value by the I.C.I. (India) Ltd. to the I.C.I. London, the appellant. It may be pointed out that in the order of the Tribunal 'assessee' refers to the I.C.I. (India) Ltd. and 'I.C.I.' refers to I.C.I. London, that is, the appellant herein. The said findings of the Tribunal were ultimately approved and affirmed by the Supreme Court when the said matter reached there through this High Court in the reference proceeding under Section 256 of the Income-tax Act, 1961. Judgment of the Supreme Court dated 20th of January, 1972, is at pages 425-444 of the paper book and is also reported in : 83ITR710(SC) . It will be convenient to refer to the pages of the appeal paper book wherein the Supreme Court judgment has been set out. The Supreme Court observed at pages 427-428 as follows (See 83 ITR 712, 713) :
'The Tribunal upheld the decision of the Appellate Assistant Commissioner by a detailed and well reasoned order.
Broadly, the case of the assessee was that I.C.I. wanted to make investments in India in sterling currency. The assessee was already in existence but the other three companies, which have been mentioned, were incorporated later. I.C.I. devised a scheme by which it could make the investment as desired by it and by which it could also take advantage of the tax relief which could be availed of by the new enterprises under Sections 15C and 56A of the Indian Income-tax Act, 1922. The scheme in short was that I.C.I. would arrange to let the assessee hold shares in the three companies by investing the money which was to be given by I.C.I. to the assessee. The modus operandi was that I.C.I. would give that money by way of loans to the assessee who agreed that the shares in the three companies would be transferred to I.C.I. in satisfaction of the loans at par or issue price as and when desired by I.C.I. All this was done after negotiations with the concerned department of the Government of India at the highest level and with the approval of the Reserve Bank of India. The entire scheme was conceived and was put into operation prior to 30th November, 1956, when the Finance Bill was introduced reimposing capital gains tax which had remained abolished for certain years. There was a provision for charging interest by the I.C.I. from the assessee at a rate not exceeding 1/2% above the Indian bank rate which came to 51/2% per annum but the interest was not to exceed in any case the dividends received by the assessee from those shares. It was claimed on behalf of the assessee that this arrangement was advantageous both to I.C.I. and the assessee. I.C.I. having taken the risk (of depreciation in shares or otherwise) attached to the new business pioneering adventures ensured that capital appreciation of the shares, if any, also went to itself. The assessee did not suffer any disadvantage because it had to pay no interest if no dividend was received and it could keep and get the benefit of any dividend in excess of 51/2%. As a result of I.C.I. investments being held through the assessee instead of directly, I.C.I. achieved an advantage of saving tax in U.K. amounting to 68,000 in the relevant years.
In 1959 the structure of Indian taxation regarding the grossing up of dividends was radically changed and by the Finance Act, 1959, the system of grossing up of dividends (under Sections 16(2) and 18(5) of the 1922 Act) was abolished and intercorporate dividends became liable to income-tax at each stage. Thus, the dividends passing from the three companies through the assessee to I.C.I. became liable to tax at two stages. This affected the net return of I.C.I. on its investments in the three companies substantially. In these circumstances, it was decided by I.C.I. that the investments in the three companies should be held by it directly. For that reason it called upon the assessee in February, 1961, to transfer to it the aforesaid shares in the three companies at the issue price in satisfaction of the sterling loans in accordance with the previous agreements. The approval of the Reserve Bank to these transfers was received in February, 1961, and the transfers were made in March/April 1961. According to the assessee there was no question of the transfer of shares having been effected with the object of avoidance or reduction of the liability of the assessee to capital gains which alone could attract the applicability of Section 52 of the Act.'
26. Then at page 459 of the paper book the Supreme Court observed as follows (See 83 ITR 714) :
'The Tribunal examined fully the correspondence and the other material with regard to each of the three Indian companies in which the investment had been made of the money advanced by I.C.I. to the assessee.'
27. Thereafter, the Supreme Court noted briefly the discussion relating to the transaction as made by the Supreme Court and quoted the relevant portions therefrom which I have set out before. Finally the Supreme Court held at pages 438-439 of the paper book as follows (See 83 ITR 718, 719) :
'We are altogether unable to see how findings of the Appellate Tribunal that the transfer of shares in the present case was not made with the intention or object of avoidance or reduction of liability to capital gains were not questions of fact and did not depend on inference of facts from the evidence or the material before the Tribunal. It can well be said that the determination of the question whether the object of the assessee was to avoid or reduce its liability to capital gains by making the transfers in question did not involve the application of any legal principles to the facts established by the evidence. The findings of the Tribunal were amply supported by evidence and were eminently reasonable. It is true that the amount involved is very large but that cannot justify a reference as under Section 256 of the Act neither the Appellate Tribunal could make a reference nor could the High Court direct the reference to be made to it by the Tribunal on pure questions of facts.'
28. The Supreme Court upheld the appeal of the I.C.I. (India) Private Ltd. and confirmed the finding of the basis and primary facts by the Tribunal and held that Section 52 of the Income-tax Act has no application to the facts of the case having regard to the nature of the transaction pursuant to the agreement and arrangement between the parties.
29. Therefore, the whole case of the respondent, income-tax authority, is based on the alleged omission on the part of the appellant to disclose is memorandum, articles of association and world balance-sheet during the assessment for the assessment year 1962-63, which were admittedly completed by the then Income-tax Officer on the 27th of July, 1965, and communicated to the appellant on the 7th of August, 1965. That is the outcome of the difference between the first notice under Section 148 of the Income-tax Act, 1961, issued on the 23rd of September, 1968, and the second notice dated the 20th of May, 1970. It is true that in the reasons for the second notice as disclosed by respondent No. 1 some elaboration of the reasons of the first notice was attempted by alleging that the appellant should have shown the interest received from the said loans and advances made to its Indian subsidiary as income in the course of carrying on business as capitalist and financier of associated companies and the difference between the market price and face value of the said shares as taken over by the appellant from its subsidiary should have been shown as business profit. It is also true that those aspects of the matter really follow from the interpretation as now sought to be put by the Income-tax Officer before issuing the second notice dated the 20th of May, 1970. It appears that factually the memorandum and articles of association were produced by the appellant long prior to December, 1968. There cannot be any doubt whatsoever that the respondents are either wrong or deliberately avoiding to admit the fact that the memorandum and articles of association were filed by the appellant when asked by the then Income-tax Officer concerned being one, Srivastava, in 1961, to which reference has already been made. The way the affidavit disclosing the relevant correspondence showing the filing of these two documents by the appellant with the income-tax authorities has been dealt with in the affidavit filed by the respondents in this appeal leads to the conclusion that the memorandum and articles of association were already in the assessment records of the appellant since 1961. The respondents simply stated through a Tadbirkar of this appeal proceeding that the said memorandum and articles of the appellant cannot be traced out, which were filed in 1961, as appearing from the correspondence disclosed by the appellant in this court. From the facts discussed above it must be held that the respondents are not correct as to the existence of one of the reasons for issuing the second notice under Section 148, viz., that the appellant did not disclose its memorandum and articles of association. Moreover, it is now well settled that the memorandum is wholly irrelevant on the question of an income of a company, which solely depends on the nature of the transaction involved. Further, from the facts of this case it appears that the same amount of profit from business which respondents, alleged against the appellant having escaped assessment for the assessment year 1962-63 and subject-matter of the first notice issued on the 23rd of September, 1968, were the same and identical and the Income-tax Officer had no difficulty to issue the said notice giving practically the same reason minus the clause of the memorandum of the appellant which empowers the company to finance, inter alia, its associated companies. The Supreme Court decision in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax : 27ITR49(SC) , where a very similar situation arose in a reference under Section 66 of the Indian Income-tax Act, 1922, and one of the questions answered by the High Court in the affirmative was 'whether on a proper construction of the relevant clauses of the appellant-company's memorandum of association and articles of association and on a consideration of the circumstances in which the shares of the Saraswati Sugar Syndicate were purchased and sold, it could be held that the purchase and sale of such shares was a part of appellant-company's business deal ?'
30. The Supreme Court reversed the answer of the High Court and answered the said question in the negative. In that case the managing director of the assessee-company entered into an agreement to invest a large amount in a sugar company in lieu of which the managing agency of a sugar mill of the said sugar company which was to come into existence in future would be given to the assessee-company on the same terms as given to the other managing agents of other mills of the said sugar company. The said agreement was subsequently modified to the effect that the assessee-company would subscribe for the shares of the said sugar mill for the amount which was agreed to be invested by purchase of shares by the assessee-company and by their friends, in fact, shares for value of Rs. 3 lakhs were purchased by the assessee-company pursuant to the said arrangement. But ultimately, the third mill of the sugar company did not come into existence and as such the whole agreement or arrangement as intended by the parties fell through. Consequently, the assessee-company decided to sell the said shares of the sugar company from time, to time which resulted in an excess of Rs. 2,26,700 over the original cost price. The said excess amount was sought to be taxed by the Income-tax Officer as profit whereas the assessee-company alleged that the same was capital appreciation. So, the only question was whether the said amount was a receipt from business or a mere appreciation of capital. The income-tax authority relied on a clause of the memorandum of association of the assessee-company which stated 'to undertake the management of a commercial undertaking' and contended that the said excess amount was a profit earned in course of carrying on a business under the said object clause of the memorandum of association of the assessee-company. Mahajan C.J., at page 52 of : 27ITR49(SC) , dealing with the question observed as follows :
'If the acquisition by the assessee-company of the managing agency of a commercial undertaking were outside the objects clause of the memorandum of association then such acquisition would have been wholly ultra vires. The circumstance whether a transaction is or is not within its powers has no bearing on the nature of the transaction, or on the question whether the profits arising therefrom are capital accretion or revenue income. The High Court recognised the fact that the main purpose of the assessee-company was to acquire a managing agency and a directorship but held that as that object was not achieved because the acquisition of the managing agency became impossible and as it withdrew the shares and sold them at a profit, it must be regarded as the profits of the business or the adventure. We think that in so holding the High Court fell into an error.
The exact nature of the business which the assessee-company was doing is admittedly not clear from the record but it is not denied that the memorandum of association of the assessee-company did not authorise it to purchase and/or sell shares as dealers nor is it denied that beyond this isolated transaction of purchase and sale the assessee-company did not deal in shares. It seems that the object of the assessee-company in buying shares was purely to obtain the managing agency of the third mill which no doubt would have been an asset of an enduring nature and would have brought them profits but there was from the inception no. intention whatever on the part of the assessee-company to resell the shares either at a profit or otherwise deal in them.'
31. The same principle was also laid down by a Division Bench of this court in Commissioner of Income-tax v. J. K. Eastern Industries (P.) Ltd. : 55ITR376(Cal) . Now, it may be pointed out that the Clause 4(y) which was one of the basis and reasons of issuing the second notice under Section 148 of the Income-tax Act, 1961, on the 20th of May, 1970, on the appellant runs as follows :
'(y) To carry on business as capitalists and financiers and to undertake and carry on all kinds of financial, commercial, trading, trust, loan, agency and other operations, and to finance and provide money to or for any of the company's associated companies or for any other company, association or firm in which the company may hold shares or other interests or with which the company may have dealings upon such security as may be thought fit or without security.'
32. Apart from the question that the memorandum of association is irrelevant for the purpose of determining whether a particular amount is profit of a company or not as the said question depends solely on the nature of the transaction which resulted in the profit being credited to the assessee-company for the said amount, in this case it must be held that the appellant-company was not guilty of omission to disclose its memorandum and articles of association sought to be alleged by the income-tax department as those documents were already in the file and produced before the Income-tax Officer in the year 1961, and there is ample material to hold that the said documents were in the file of the assessee for the relevant assessment year 1962-63. So there cannot be any question of not disclosing the said documents as sought to be alleged by the said second notice dated the 20th of May, 1970. That reason must be held to be without any basis and entirely wrong and incorrect.
33. Mr. Balai Pal appearing for the respondent also sought to contend that even assuming that the said documents were produced before the Income-tax Officer for the relevant assessment year, i.e., assessment year 1962-63, by the appellant it would not amount to disclosure within the meaning of Explanation 2 of Section 147 of the Income-tax Act, 1961, which runs as follows :
'Explanation 2.--Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.'
34. The said Explanation refers to voluminous account books and similar other documents which require very careful scrutiny and material evidence cannot be discovered from such documents in spite of due diligence having regard to the nature of the documents. As for example, if voluminous accounts and account books are produced before the Income-tax Officer without pointing out the relevant entries in the books of account, that would not amount to disclosure within the meaning of Section 147(a) of the Income-tax Act, 1961. The word 'not necessarily' in the said Explanation 2 is very significant and clearly indicates that whether it is a disclosure or not within the meaning of the said Section 147(a) would depend on the facts and circumstances of each case, that is the nature of the document and circumstances in which it is produced. A memorandum or articles of association of a company cannot come within the meaning of the said Explanation 2. The production of the said two documents before the Income-tax Officer would be enough to enable the Income-tax Officer to draw inferences of law. It is part of the Income-tax Officer's duty and functions to be discharged, with which the assessee has got nothing to do. It is not expected that the assessee will explain clause by clause the articles of association and the memorandum of association to the Income-tax Officer to make him understand the legal effects and inferences possible from suc