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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: ASSAM OIL Co. Ltd.
Court Name: Calcutta High Court Judge(s): Sudhindra Mohan Guha, Sbyaaachi Mukharji Title: COMMISSIONER OF INCOME-TAX vs ASSAM OIL Co. Ltd. Case No.: Income-tax Reference No,374 of 1971 Date of Judgment:1980-06-10 Reported As: 1985 PTD 123 Result: Questions answered accordingly
JUDGMENT
JUDGMENT ' SABYASACHI MUKHARJI, J.-- Under section 256(1) of the I.T. Act, 1961, this reference has been made for the year 1960-61. It appears that on the 25th January, 1962, the assessee wrote a letter to the assessing I.T.O. Explaining therein, according to the assessee, the management charges paid by the assessee to the parent company in London. On the 5th March, 1962, the assessee-company by a letter replied to the query made by the I.T.O. At the time of the original assessment for furnishing details regarding the various items including the London office management expenses. The company in the said letter referred to its earlier letter, dated 25th January, 1962, which we have mentioned hereinbefore. On the 17th March, 1962, the original assessment was made by one Sri G.P. Gupta, who was, at that time, the I.T.O. And in the said order the total income computed was Rs,3,62,092. Subsequently, the Rajasthan High Court in the case of C.I.T. v. Gotan Lime Syndicate (1964) 51 I T R 533, a decision to which we will presently refer in the detail, held that the sum paid, in that case, by the assessee every year was in consideration of royalty and the same expenditure was held to be a capital expenditure for acquiring the asset or advantage for the enduring benefit of the assessee's business. On the 13th February, 1964, the I.T.O. Rectified the orignial assessment and computed the income at Rs,3,63,97,836. On the 15th December, 1964, the I.T.O. Issued a notice under section 147(b) of the I.T. Act, 1961, disallowing a sum of Rs, 14,10,107, being the amount of royalty on crude oil and gas claimed in the original assessment and allowed in the original assessm ent as a business expenditure. A notice was issued thereafter under section 147(b) of the I.T. Act, 1961, in consequence of an alleged information which was said to be contained in the decision of the Rajasthan High Court referred to hereinbefore. We must observe that the case proceeded upto the Tribunal on the basis of the decision of the Rajasthan High Court that the I.T.O.
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Had obtained information that the royalty allowed as deduction was not be allowed as a revenue deduction in computing the income of the assessee. But during the hearing of the reference before us, learned Advocate for the revenue sought to urge that the real information was contained in the order of the I.T.O., viz, that as a result of the decision of the Rajasthan High Court, the Department, had called for the records for the assessment year 1963-64 and, thereafter, the deed or payment of royalty was examined in detail, which deed was not referred to in the original asessment for the year 1960-61, with which we are concerned. As a result of the examination of the same, the I.T.O. Came to the conclusion that the income of the assessee had escaped assessment. But we must point out that before the Tribunal as well as before the A.A.C., the only basis upon which the case proceeded was that the decision of the Rajasthan High Court referred to hereinbefore, constituted information and as such section 147(b) of the I.T. Act, 1961, was attracted. The fact that as a result of that decision as for royalty, which was examined for the year 1963-64, was considered also and this constituted information was not convassed before the authorities below. Therefore, we must proceed to examine on the assumption that the information upon which the I.T.O. Sought to reopen the assessm ent was the decision of the Rajasthan High Court, as mentioned hereinbefore. On the 25th January, 1965, the work study made by the Burma Oil Co. a parent company, in respect of the accounting year 1962-63 showed that the London office management expenses for the said two years, 1962 and 1963, were 1.1,10,000. On the 22nd November, 1965, the I.T.O. Made the reassessment under section 23(3) read with section 147(b) of the I.T. Act, 1961, overrulling the objection that there was no fresh information in consequences of which the I.T.O could have assumed jurisdiction under section 147(b) of the I.T. Act, 1961. The I.T.O. In the said reassessment disallowed, (a) the payment of royalty on crude oil and gas; and (b) the sum of 1.1,50,000 out of 1.2,50, 000 claimed by way of London office management expenses. On 26th September, 1966, the A.A.C. Set aside the assessm ent. He, however, held that the reopening of the assessment under section 147(b) of the Act was legal and valid. He set aside the assessment and sent the case back to the I.T.O.To redo the assessm ent after giving the assessee a proper opportunity to explain the reasonableness or otherwise of the London office management expanses. ' On the 16th May, 1970, the Tribunal held that the action taken under section 147.(6) in respect of royalty payments, though validly taken, did not result in any reassessment as information on the basis of which assessm ent was reopened, was found to be wrong subsequently by the Supreme Court in the case of Gotan Lime Syndicate v. C.I.T. (1966), 59 1 T R 718, which was an appeal from the Rajasthan High Court's decision referred to hereinbefore. The Tribunal, however, held that the action under section 147(b) in so far as it related to the London office management expenses was not validly taken and it could not be sustained as there was no information in the possession of the I.T.O. Leading to a reasonable belief that the income chargeable to tax had escaped assessment for the relevant year on account of the allowance of London office management expenses. The Tribunal, on the 26th August, 1970, rectified its appellate order in certain respects in the miscellanceous application, dated 17th July, 1970, with which we are not concerned. Again, on the 7th November, 1970, the Tribunal passed an other rectification order in the second application of the assessee, dated 29th August, 1970, with which also we are not concerned. The Tribunal however, rejected the miscallaneous application, dated 17th March, 1971, made by the department, dated 27th November, 1970, with which also we are not concerned. Upon these facts both at the instance of the assessee and at the instance of the revenue, these two questions have been referred to this Court: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the decision of the Rajasthan High Court in the case of Gotan Lime Syandicatge constituted 'information' to the Income-tax Officer, on the basis of which proceedings under section 147(b) were validly taken in respect of the claim for royalty payments and that the pronouncement of the
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Supreme Court rendered, subsequently, in the same case did not render the proceedings taken by the Income-tax Officer ab initio void ? 2. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that action under section 147(b) of the Income-tax Act, 1961, in so far as it related to the claim for deduction of London office management expenses was not validly taken and could not, therefore, be sustained ?" ' So far as the first question is concerned, shortly, the controversy is whether there was any valid information. The scheme of reopening as embodied in section 148 and section 147 of the LT. Act, 1961, has been explained in numerous decisions of the Supreme Court as well as of different State High Courts. A completed assessm ent, within the time mentioned in the Act, can be reopened by serving a notice under section 148 of the I.T. Act, 1961. Such a notice, however, can be given only when conditions contemplated either by clause (a) or clause (b) of section 147 of the I.T. Act, 1961, are fulfilled. Clause (a) of section 147 deals with failure or omission on the part of the assessee to disclose fully or truly all relevant or material facts. We are not concerned with such a situation in the instant case. Clause (b) of section 147 of the Act, with which we are concerned in this case, enjoins that an assessm ent can be reopened within the time of 4 years provided there is information in the possession of the I.T.O and as a result of such information the I.T.O. Comes to the belief that the income of the assessee has either escaped assessment or has been under- assessed. Therefore, in order to be a valid reopening by virtue of the powers under clause (b) of section 147 of the I.T. Act, 1961, there must be information. It is well-settled by numerous decisions that whenever there is reassessm ent of an escaped income there is bound to be a change of opinion of the I.T.O. a change in the sense of a different view of the assessment than the view taken at the original assessm ent. But such a change of opinion cannot be done without a valid cause. Clause (b) contempletes an information that is to say, an information which must cause a view to occur, if there is such an information in which a new view about the assessment can be taken then there can be a reassessm ent. It is also well-settled that in order to attract the jurisdiction one has to consider the condition as it prevailed on the date of the issuance of the notice under section 148 of the I.T.O. Act, 1961. This position was explained in an unreported Bench Decision of this Court, viz, the decision in Appeal No,185 of 1962, I.T.O v. Textile Mills Agents P. Ltd. Judgment delivered on 18th March, 1974 since reported in (1981) 130 I T R 733 and on which reliance was placed by both sides. Speaking for the Division Bench, which heard an appeal from a decision under article 226 of the Constitution, I had observed as follows (pp. 736-737): "In order to determine whether the I.T.O had jurisdiction to issue the impugned notice we must consider the facts as these were on the date when the impugned notice was issued. Subsequent discovery of any new fact would not confer upon the I.T.O jurisdiction if he did not have the jurisdiction at the time of the issuance of the notice. Similarly, subsequent information regarding the falsity of the case or casting doubt on the genuineness of the information upon which the I.T.O had acted would not defeat the jurisdiction of the I.T.O if he had jurisdiction to issue the impugned notice on the materials before him. Subsequent decision of the A .A .C. Would not either confer jurisdiction if the I.T.O. Had not originally the jurisdiction at the time of the issuance of the notice or defeat the jurisdiction of the I.T.O. If he had it at the time of the issuance of the notice. This proposition is well-settled by the scheme of the Income-tax Act and for this no authority is needed. Indeed, counsel for the respondent did not seriously dispute this proposition. What he contended, however, was that though the subsequent information would not confer or take away the jurisdiction of the I.T.O., the subsequent determination by a higher authority about the quality of the information was a relevant factor to be taken into consideration, in determining the nature of materials upon which the I.T.O. Acted. In so far as it is stated that the subsequent determination by a higher authority as to the quality of the basis of the information is a relevant factor, in our opinion,
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cannot be disputed but in this connection it has to be borne in mind that the A.A.C., for the assessm ent year 1964-65, did not make any finding that there was any regular and genuine transaction of money-lending." ' The question, therefore, is, was there any valid information? On behalf of the assessee, it was contended that the decision of the Rajasthan High Court upon which the I.T.O. Purported to rely was not a decision which held that royalties were capital expenditure. It was submitted that the Rajasthan High Court was not dealing with the case of royalty of the type with which the assessee- company was concerned. Our attention was drawn to certain observations of the Tribunal at page 38 of the paper book, where the Tribunal had observed, inter alia, as follows: "Subsequent to the completion of the original assessment, the Income-tax Officer became aware of the decision of the Rajasthan High Court in Commissioner of Income-tax v. Gotan Lime Syandicate (1964), 51 I T R 533, wherein the High Court had held that payment of royalties by the assessee, in that case, for obtaining mining rights for the mining of limestone was capital in nature and could not be allowed as a deduction in the computation of the income of the assessee. In the case of the assessee before, us, there were payments of royalties during the material accounting year on crude oil and gas amounting to Rs,14,10,107. In the original assessment the assessee had claimed these payments as a revenue expenditure and the Income-tax Officer had also allowed it as such. In the light of the decision of the Rajasthan High Court, cited above, the successor Income-tax Officer was of the view that his predecessor had wrongly allowed royalty payments as revenue expenditure..." ' According to the Tribunal: "In the case of the assessee before us, there were payments of royalties during the material accounting year on crude oil and gas, amounting to Rs,14,10,107. In the original assessm ent, the assessee had claimed these payments as a revenue expenditure and the Income-tax Officer had also allowed it as such". Therefore, it was sought to be argued that this was so found by the Tribunal that the royalty, in this case, was only on the amount of crude oil and gas extracted. It was not the royalty or any payment to have access to the source of the oil nor was it a royalty irrespective of the oil extracted. It was urged that there was no minimum royalty ensured in this case. These findings, however, do not appear from the order of the Tribunal as these aspects were not examined. It was on this basis urged that even assuming that the decision of the Rajasthan High Court constitute an information that decision could not properly be applied to the facts and circumstances of this case. Now, in order to appreciate this contention. It would be necessary to refer to the decision of the Rajasthan High Court in the case of C.I.T v. Gotan Lime Syndicate (1964), 51 1 T R 533. There, the assessee firm which carried on business of manufacturing lime from limestone acquired under a lease from the Government of Jodhpur, the right of excavating limestone in certain areas and the monthly right to prepare lime therefrom. That lease was for a period of 5 years from 15th July, 1947, to 14th July, 1952. From 15th July, 1952, the Government of Rajasthan granted a few small-term extensions and on 4th October, 1954, the Rajpramukh of Rajasthan conveyed sanction to lease out to the assessee an area of 15 square miles of lime deposits on the terms and conditions prescribed under the Jodhpur Division Vindhyan Limestone Mining Leases Rules, 1954. For the period from July, 1952, up-to-date, a new lease was to be given effect to and a fixed royalty of Rs,96,000 per year was agreed upon. For the period of the lease, under the rules of 1954, the Schedule to the Rules fixed a royalty of 1 Anna 6 pies per Maund of lump lime and 1 Anna per Maund of limestone subject to a deed rent of Rs,10 per acre. Rule 4 of the Rules defined the meaning of the lease as a lease to mine, quarry, box, dig and search for, win, work and carry away limestone. The mining lease could be granted only to a holder of a certificate of approval from the mining department and was transferable only to a holder of a similar certificate. Rule 18 provided that the period for which a mining lease might be granted should be for 5 years. Rule 19 laid down that the lessee should not encroach upon cultivable land or Bapi holdings within
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the lease area without the permission of the Director of Mines and payment of compensation to the holder of such land. No lease deed, however, was in fact executed but the assessee continued to work the quarries. For the accounting year 1953-54 to 1955-56, the royalty fixed by the Schedule being less than the deed rent, the assessee paid a sum of Rs,96,000 per year to the State Government on the basis of the deed rent. It claimed this amount as expenditure allowable under section 10(2)(xv) of the Indian I.T. Act, 1922. It was held by the Supreme Court that in view of Rule 18 of the Rules the term of the lease in favour of the assessee was one for a period of 5 years certain apart from the lease being renewable for another term of 5 years at the option of the lessee and this position was not altered because no lease deed was in fact executed. It was held that a sum of Rs,96,000 paid by the assessee was in the nature of royalty. It was held further that though the assessee's did not acquire any right in the land as such it had a right to enter into the land and to search for the lime deposits and to quarry or mine and win them and then to work them to do lime and sell it. The assess's business was not, therefore, merely to manufacture all lime into limestone but including the prospecting and winning all limestone in the areas granted to it. The assessee acquired by the expenditure not so much the limestone deposits as such as complex right, viz, the right to search for and win limestone, or, in other words, it acquired a means to acquire raw materials for its business. The expenditure was incurred for the purpose of acquiring an asset or advantage for the enduring benefit of the assessee's business and was, therefore, capital expenditure. ' The circumstances that the assessee was required to make annual and recurring payment and that this payment might have varied from year to year under certain circumstances did not make any difference in the position. The Rajasthan High Court at pages 541, 543, 544, 551 to 554 of the report (51 I T R) made repeated references to the nature of the lease and observed that royalty paid in respect of such lease could not be considered to be revenue expenditure. It was sought to be urged on behalf of the assessee that the royalty which was paid as a deed rent or. Irrespective of production could not be business expenditure. But here, in the instant case, it was sought to be urged that the royalty was in respect of crude oil and gas. On behalf of the revenue, it is sought to be urged that this aspect was not really canvassed before the Tribunal from this point of view, we do not think that this is material to go into the question whether this aspect was really convassed before the Tribunal. In This aspect even if it is canvassed that this legal position was not convassed, we can re-examine this case. The real point in this. Matter is that the Rajasthan High Court treated both the payment of a deed rent as it called it rent irrespective of production and the royalty to be paid depending on the manufacture on similar grounds and then proceeded to observe that the payment of such realty as in the facts found by the Rajasthan High Court could not be considered to be revenue expenditure. But before the decision of the Rajasthan High Court this claim for deduction was not examined by the revenue authorities from this angle. Therefore, in our opinion, if there was a decision by the Rajasthan High Court, this being a relevant judicial decision, the relevant point could have been validly consitituted as undisputable information in terms of clause (b) of section 147 of the I.T. Act, 1961. ' Learned Advocate for the assessee drew our attention to the decision of the High Court of Travancore-Cochin in the case of Travancore Minerals Co. Ltd. v. C.I.T. (1955), 28 I T R 505, where the Travancore Minerals Co. Ltd., a company formed for the purpose of exploiting for the purpose of sale of monazite sand in the erstwhile State of Travancore, entered into a lease with the State, under which it agreed to pay a minimum royalty at the rate of Rs,30 per ton of monazite exported or sold, and if the market price of monazite exceeded L.20 per ton, a surplus royalty of 10 per cent, on any excess over 1.20. It also agreed to pay "in addition to the royalty fixed as above an additional royalty equal in amount to ten per cent, of the net earnings of the lessee arising out of its operations under this lease". The lessee was to keep separate accounts relating to its operations
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and the net earnings were to be ascertained from such accounts. It was held by the Travancore- Cochin High Court on the true construction of the contract between the parties the payment of the "additional royalty equal in amount to ten per cent, of the net earnings of the lessee" was an expenditure in the nature of revenue expenditure incurred by the company for the purpose of the business, and not a sharing of the profits of the business, and the expenditure was, therefore, allowable as business expenditure in computing the assessable income of the company. Reliance was also placed on the observation of the Court appearing at page 509 of the report. Reliance was also placed on the observation of the Supreme Court in the case of Pingle Industries Ltd. v. C.I.T. (1960) 40 I T R 67. Our attention was also drawn to the observation of the Court appearing at page 93 of the report. It was sought to be urged that even before the Rajasthan High Court had expressed its view in the case of Gotan Lime Syandicate (1964) 51 ITR 533 referred to herein-before, the Supreme Court had made an observation upon which a view could have been taken as was taken at the time of the original assessment. Such expense could be allowed as proper. It was further urged that this view was also in consonance with the views of the Travancore-Cochin High Court rererred to hereinbefore. It appears to us that nothing had been referred to show that the I.T.0 was aware of the observation of the Supreme Court of the views of the Travancore-Cochin High Court. In our opinion, it cannot be disputed that the decision of the Rajasthan High Court, when it was delivered, certainly constituted valid information. ' But the main question that was urged in this case on behalf of the assessee was that this view of the Rajasthan High Court in Gotan Lime Syndicate's case (1964) 31 I T R 533 was reversed by Supreme Court. The decision of the Supreme Court in Gotan Lime Syndicate v. C.I.T. (1966) 59, I T R 718, where the Supreme Court reversed the view of the Rajasthan High Court and observed at page 725 of the report that there was no doubt that the assessee did derive an advantage by having entered into the arrangement. The Supreme Court had assumed for the sake of the case that the advantage was to last a least for a period of five years. The Supreme Court examined the case in the light of the observation, also referred to in the case of the Pingle Industries Ltd. v. C.1.T. (1960) 40 I T R 67 (SC), referred to hereinbefore, and, at page 727, observed that the payment of royalty in the facts of that case was not a direct payment for securing an enduring advantage. It had relation to the raw material to be obtained and, therefore, it was a revenue expenditure. ' It was sought to be urged that the effect of the Supreme Court decision is the declaration of the law as it always was. It is not the fact that the law becomes effective on the date of the decision of the Supreme Court. The Supreme Court declares what is law. Such is the effect of the judgment made by the Supreme Court. In aid of this submission reliance was placed on the observations of the Maharashtra High Court in the case of Nalchand Nagar Industries Ltd. v. V.S. Gaitonde, I.T.O. (1962) 44 I T R 260 at p. 265, the decision of the Gujarat High Court in the case of Parshuram Pottery Works Co. Ltd. v. D.R. Trivedi, W.T.O. (1975) 100 I T R 651 at p.656, the decision of the Madras High Court in the case of R. Kuppuswa my Mudaliar & Sons v. Board of Revenue Commercial Taxes (1980) 45 S T C 152, the decision of the Madras High Court in the case of K. M. Jamal Mydeen v. State of Madras (1968) 22 S T C 45 at p.46 and also the decision of the Division Bench of the Mysore High Court in the case of M.V. Gavindaraju Chetty v. C.T.O. (1968) 22 S T C 46, where at page 52, the Division Bench observed as follows: "To say that a decision of the Supreme Court to the effect that a particular levy was wrong or not in accordance with law means that the levy was at no time good, is nothing more than to state in clear terms there real effect of a decision of the Court." ' Therefore, it was sought to 13e urged that the law as declared by the Supreme Court is deemed to be the law from its very inception and, therefore, a large number of decisions was cited to emphasize that in the case of rectification it is the law as declared by the Supreme Court that is always applied.…
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