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PETITIONER: INDIAN OIL CORPORATION

       Vs.

RESPONDENT: INCOME TAX OFFICER, CENTRAL CIRCLE V, CALCUTTA & ORS.

DATE OF JUDGMENT08/05/1986

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) PATHAK, R.S.

CITATION:  1987 AIR 1897            1986 SCR  (2)1107  1986 SCC  (3) 409        1986 SCALE  (1)1022

ACT:      Income Tax  Act, 1961  - S.147(1)(a)  - Income escaping assessment -  Initiation of  proceedings for  reassessment - Necessary conditions - What are.

HEADNOTE:      The  assessee  at  the  relevant  time  was  a  company incorporated under  the laws  of the United Kingdom, and had its principal  place of  business in India. The assessee was all along  assessed under  the Indian  Income Tax Act, 1922. The assessee  had claimed  deductions every  year of certain expenses amounting  to L  1,00,000 or over as administrative charges incurred by the Burmah Oil Company Limited of London for management  and secretarial work carried on on behalf of the assessee in London. L 1,00,000 represented approximately 40% of the head office expenses of the London Company which, according to  assessee, was  a reasonable  allocation having regard to  the work  done by  the London Office on behalf of the assessee.  As similar  organisational work  was done  in London through  the London  Company, the  London office  was managing several  companies  and  debiting  prorata  to  the companies whose  affairs they  were managing  and thereafter the assessment was completed on that basis.      During  the   assessment  for  the  year  1953-54,  the assessee had  furnished in  support of  its claim for London Management expenses,  certificate from  the London  Auditors that the  sum specified  in the  certificate was  reasonable having regard  to the  records and materials produced before the  auditors,   which  was   about   10%   of   the   total administrative expenses  incurred by  the Burmah Oil Company Limited, London.  The Income-Tax  Officer  found  that  such expenses debited  actually in  the earlier years were far in excess of  this percentage.  The  assessee  was,  therefore, required to  furnish a  similar certificate  for each of the assessment years  1957-58,  1958-59  and  1959-60.  No  such certificates were  produced by  the assessee  and  by  three notices dated November 25, 1965 under 1108 s.148 of  the Income-tax  Act 1961,  the Income  Tax Officer notified that  he had  reason to believe that the assessee’s income chargeable  to tax  for each  of the  said assessment year had  escaped assessment within the meaning of s. 147(a)

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and he  proposed to  reassess the  income for the said years and the assessee was required to furnish the returns.      The assessee challenged the said notices under Art. 226 of the Constitution on the ground that there was no material to reopen  the assessments. A Single Judge of the High Court quashed  the   notices  and  held  that  all  the  facts  in possession of  the assessee  were placed  before the  taxing authority prior to making of the assessment; that it was for the taxing authority either to accept the claim or to reject the claim  either wholly  or  in  part;  that  after  having accepted  the  claim  in  spite  of  non-production  of  the relevant auditors’  certificate which  was asked  for at one stage the  revenue could  not later  turn round and say that the income  of the  assessee had  escaped assessment or been under-assessed  due  to  the  failure  of  the  assessee  to disclose those  very auditors’  reports and  that the  under assessment, if any, was due to the laches of the Revenue and not due to any act or omission on the part of the assessee.      In the  appeal filed by the Revenue, the Division Bench set aside  the decision  of the  Single  Judge,  upheld  the notices and  held that  the assessee had failed to disclose; (1) the  basis of allocation of expenses; (2) correspondence between the London principal and the assessee company on the relevant subject;  (3) existence  of  auditors’  certificate fixing percentage that would be reasonable for allocation in respect of  the subsidiary  companies including the assessee and, therefore, there were prima facie materials to form the belief that  there was  failure and  omission in the part of the assessee  to disclose  fully and  truly all the relevant and material  facts which led to the escapement of income or under assessment of income of the assessee company.      Allowing the  appeals of  the appellant-Corporation  to this Court, ^      HELD: 1.  To confer  jurisdiction under  clause (a)  of s.147 of the Income Tax Act, 1961 beyond the period of four 1109 years but within a period of eight years from the end of the relevant year  under s.  148 of  the  assessment  year,  two conditions were  required to be fulfilled: first is that the Income-tax Officer  must have  reason to  believe  that  the income  profits   or  gains   chargeable  to  tax  had  been underassessed or  escaped assessment; the second was that he must  have   reason  to  believe  that  such  escapement  or underassessment was  occasioned by reason so far as relevant for the  present purpose  to disclose  fully and  truly  all material facts  necessary for  the assessment  of that year. Both  these   conditions  are  conditions  precedent  to  be satisfied. [1121 G-H; 1122 A-B]      2. Section  147(a) postulates  a duty on every assessee to disclose fully and truly all material facts necessary for the assessment.  Therefore, the  obligation is  to  disclose facts;  secondly  those  which  are  material;  thirdly  the disclosure must be full and fourthly true. [1125 C-D]      3. What facts are material and necessary for assessment will  differ   from  case   to  case.  In  every  assessment proceedings, for computing or determining the proper tax due from the  assessee, it  is necessary  to know  all the facts which help  the assessing authority in coming to the correct conclusion.  From  the  primary  facts  in  his  possession, whether on  disclosure by the assessee, or discovered by him on the  basis of  the facts  disclosed,  or  otherwise,  the assessing authority  has to  draw inferences  as to  certain other facts.  But once the primary facts are with the taxing authority it  is for  him to  draw  inferences.  It  is  not

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necessary for the assessee to draw inferences for him. [1125 D-F]      Calcutta  Discount  Co.  Ltd.  v.  Income-tax  Officer, Companies District  I, Calcutta  and Another,  41 ITR 191 at 199, S.  Narayanappa and  Others v.  Commissioner of Income- tax, Bangalore, 63 ITR 219, Commissioner of Income-tax, West Bengal, and  Another v. Hemchandra Kar and Others, 77 ITR 1, Income-tax  Officer,  I-Ward,  Hundi  Circle,  Calcutta  and Others v.  Madnani Engineering  Works Ltd., 118 ITR 1, Ganga Saran &  Sons P.  Ltd. v. Income-tax Officer and others, 130 ITR 1 at 13, Income Tax Officer, I Ward, Distt. VI, Calcutta and others  v. Lakhmani Mewal Das, 103 ITR 437 and Sheo Nath Singh v.  Appellate  Assistant  Commissioner  of  Income-Tax (Central), Calcutta  and others,  82 ITR  147 at 153, relied upon. 1110      P.R. Mukharjee  v.  Commissioner  of  Income-tax,  West Bengal, 30  ITR  535  and  Hazi  Amir  Mohd.  Mir  Ahmed  v. Commissioner of Income-tax, Amritsar, 110 ITR 630, approved.      4.(i)  The  learned  Trial  Judge  was  right  and  the Appellate Court  was in  error in  holding that  there  were materials from  which it  could reasonably  be held that the assessee was  guilty in not disclosing the basic facts.[1127 F]      4.(ii) In  the instant case, the assessee had all along disclosed and  the Revenue  was aware that London management expenses were  incurred on  behalf of  the assessee  by  the London Company  who were  managing  the  affairs  and  doing certain works  for the  assessee as  well as  certain allied companies belonging  to Burmah  Oil Corporation  Group.  The expenses for  these allied  concerns were  on pro-rata basis charged by the London office and a certain proportion of the expenses were  allocated to  different  companies  and  they debited certain  portions, i.e.these  amounts were  realised from the  assessee and  allied companies  in  proportion  to which the  London company  debited them  those charges. This fact was  known all  along to  the Revenue  while making the original assessment  for the  relevant assessment years. The audit report  of the assessee company was supplied but it is not clear whether the audit report of the London company was supplied and  was asked for. It is unlikely that when London company  was   debiting  the   assessee  company  and  other companies in the audit report every year, there would be any note that  such debits  by  which  the  London  company  got certain money  which were  excessive i.e. the London company realised more than it had actually incurred of the expenses. In  any   event,  however,  the  amount  realised  would  be mentioned in the audit report as a basic fact. That has been disclosed, to  the Revenue  at  the  time  of  the  original assessment. The  nature and the quantum of the work done had also been  disclosed. Whether it was excessive or not was an inferential fact.  The Income-tax Officer, from time to time had some  doubts as  to whether the entirety of the expenses debited were really incurred for the assessee company by the London company or whether that was unreasonable or excessive having regard  to the  magnitude of  the work  done  by  the London company  but that would be a matter of opinion and on inference drawn  from the  amount of the work in correlation to the amount debited the fact what was done, what was being claimed by the London 1111 office and the difficulties in producing the accounts or the opinion of  the auditors  for which  the Income-tax Officers had called  upon the  assessee were  all known to Income-tax Officers at  the time of making the original assessments. In

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spite of  the same,  the Income-tax  Officer chose to assess the assessee  in the  manner he  did. In  the light  of  the opinion of  the Auditors  for the  assessment  year  1963-64 wherein his  opinion that  ten per  cent would be reasonable charge might be good information for which the assessment of the assessee  could be reopened under clause (b) but on this basis alone  it could  not be  said that  the  assessee  had failed to  disclose fully  and truly  all basic facts at the time of  the original  assessment of the relevant assessment years. There  was no  evidence or  allegation that  such  an opinion was  there available  with the  assessee company the time of the original assessments. Even if such an opinion as opinion evidence  be considered  as a basic fact, a question on which  no opinion  is required to be expressed, there was no evidence  that such  opinion was with the assessee at the time or  before the  completion of  the original assessments for the relevant assessment years. [1125 F-H; 1126 A-H; 1127 A]      4.(iii)  All   the  basic   facts  in  this  case  were disclosed, it  was however  not disclosed as to what was the opinion of  the Auditor, as to what is reasonable allocation share of  the assessee  having regard  to the amount of work done on  behalf of the assessee company of the London office expenses. There  is  no  conclusive  evidence  that  at  the relevant time  i.e. at  the time  of filing  of  the  return before the  assessments, such  Auditors’ opinion  about  the reasonableness was there. Secondly, what would be reasonable or not  would be  an inference  of the  auditor. The  amount spent, the  nature of  the work alleged to have been done by London office on behalf of the assessee and the basis of the allocation had  been explained  in reply to the queries made by the Income-tax Officer before the assessment. The Income- tax Officer had asked at one point of time for the auditors’ opinion. It  was stated  that  such  opinion  could  not  be supplied. In  spite of  the same, the Income-tax Officer did not choose  to make  a best  judgment assessment and did not draw any  adverse inference against the assessee. It cannot, therefore, be  held that there was failure to disclose fully and truly all basic facts. [1127 A-E]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION : CIVIL APPEAL NOS. 1189- 1190 OF 1974 1112      From the  Judgment and  Order dated  7.12.1973  of  the Calcutta High Court in Appln. No. 189 and 196 of 1971.      Dr. Devi  Pal, Ms.  M. Seal,  D.N. Gupta, H.K. Datt and Miss Mridul Ray for the Appellant.      C.M. Lodha, Dr. V. Gaurishankar, Miss A. Subhashini and C.V. Subba Rao for the Respondents.      The Judgment of the Court was delivered by      SABYASACHI MUKHARJI,  J. Whether  the reopening  of the assessments of  the assessee  under section  147(a)  of  the Indian Income  Tax Act, 1961 (hereinafter referred to as the ’Act’) was  valid, is the question involved in these appeals by special  leave from  the Bench  decision of Calcutta High Court  dated   7th  December,  1973.  The  assessment  years involved are 1957-58, 1958-59 and 1959-60.      It may  be mentioned  that on  notices being issued for reopening of  the assessments  under section  148 of the Act under  condition  147(a)  of  the  said  Act,  the  assessee challenged the said notices on the ground that there were no materials to  initiate such  reopening. Such  challenge  was

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upheld by the learned single judge of the High Court and the notices in question were quashed.      The revenue  being aggrieved  preferred appeals  before the division  bench of the High Court. The division bench of the High  Court reversed  the findings  of the learned trial judge and the notices were upheld. Hence these appeals.      The assets  and liabilities  of erstwhile the Assam Oil Company have since then vested in the Indian Oil Corporation and on an oral application having been made on behalf of the assessee, we  have directed  that the name of the Indian Oil Corporation be substituted.      The  assessee  at  the  relevant  time  was  a  company incorporated  under  the  appropriate  laws  of  the  United Kingdom, and  had its  principal place  of business  at  the relevant time  in India  at Digboi in the State of Assam. It carried on  business, inter alia, in oils and lubricants. As the years involved were 1113 prior to  the introduction  of  the  Act  in  question,  the assessee was  all along assessed under the provisions of the Indian Income-Tax  Act, 1922  (hereinafter called  the ’1922 Act’). In  its assessment  under the  1922 Act, the assessee had  claimed  deductions  every  year  of  certain  expenses amounting to  # 1,00,000  or over  as administrative charges incurred by  the Burmah  Oil Company  Limited of  London for management and  secretarial work carried on on behalf of the assessee in  London. For  the assessment  year  1951-52,  it might be mentioned, the Income-tax Officer wrote a letter to the assessee  asking for certain informations and one of the informations asked  for was  regarding London  charges.  The assessee was  asked to  furnish a schedule in respect of the London charges  and also  to let the Income-tax Officer know whether any  reserve had  been debited  to this  account  of London charges.  The letter  was dated  19th December, 1952. The assessee  by its  letter replied  to that query where it informed  the   Income-tax  Officer   that  as   advised  in connection with the 1950-51 assessment, London charges being about #  1,00,000 represented  approximately 40% of the head office expenses of the London Company being the charges made by the  Burmah Oil  Company for  management and  secretarial work carried out on behalf of the assessee company in London covering Stores  Purchasing, Accounting,  Staff,  Geological and other  Departments. The  assessee further  informed  the taxing authorities  that it  had been  advised by its London office that  the amount  represented a reasonable allocation having regard  to the  work done  by the  London  office  on behalf of  the assessee.  As the  point in question in these appeals is whether there was failure or omission on the part of the  assessee it  is necessary  to refer in detail to the correspondence. For  the assessment year 1951-52 in response to the  enquiries the assessee made it clear that the London charges represented  the charges  made  by  the  Burmah  Oil Company which  managed the assessee company along with other companies in  respect of the management work and secretarial work carried  out  in  London  covering  the  various  items indicated before.  In other  words as similar organisational work were  done in  London through  the London  company, the London office  was managing  several companies  and debiting pro-rata to  the companies whose affairs they were managing. The assessment  was completed  thereafter apparently  on the said basis.      Similarly for the assessment year 1953-54, it appears 1114 that there was discussion between the Income-tax Officer and the assessee and certain queries were made in respect of the

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London office  charges amounting  to #  1,00,000 included in the trading  account for  1952. The  assessee by  its letter dated 9th  December, 1953  informed the  Income-tax  Officer that the  assessee’s London Principals had advised them that the total expenses of the London office for 1952 amounted to