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Petitioner: RAJPUTANA TEXTILES (AGENCIES) PRIVATE LTD. VS Respondent: DAS GUPTA, INCOME-TAX OFFICER/EXCESS PROFITS TAX OFFICER AND ANOTHERHonorable Justice TAMBE,M. M. Jhaveri and Kavarana,G. N. Joshi and R. J. Joshi
1964 P T D 566
1964 P T D 566
[Bombay (India)]
Before K. K. Desai, J
RAJPUTANA TEXTILES (AGENCIES) PRIVATE LTD.
Versus
DAS GUPTA, INCOME‑TAX OFFICER/EXCESS PROFITS TAX OFFICER AND ANOTHER
Miscellaneous Petition No. 227 of 1961, decided on 17th July 1963.
Re‑assessment‑--Income escaping assessment‑Jurisdiction to reassess‑What constitutes "definite information"‑Information which could have been obtained even at first assessment if officer had exercised due diligence‑Whether gives jurisdiction to re‑assess Meaning of "information"‑Effect of failure to exercise due diligence at first assessment‑Indian Income‑tax Act, 1922, Ss. 34 (1‑A) & 34 (1) (a)‑Excess Profits Tax Act, 1940, S. 15.
Section 34 of the Income‑tax Act and section 15 of the Excess Profits Tax Act do not contemplate that if information could have come into the possession of the officer by due diligence, then although in fact he had no knowledge of that information for the purposes of these two sections it must be deemed that he had the information and he could not act on that information although in fact he came to know of it subsequently. "Information" means something that the mind has acquired. In order that an officer should be incapacitated from acting under section 34 or section 15 he must have actual knowledge of certain facts, which knowledge he is again using for the purpose of acting under those sections. If actual knowledge was absent‑it is immaterial how that actual knowledge was absent‑then when the actual knowledge does come about it confers jurisdiction upon the officer to act under those two sections.
The promoters of the petitioner‑company entered into an agreement with another company in April 1943, by which the latter agreed to transfer their managing agency of Apollo Mills for Rs. 12 lakhs and the whole of their holding of 19,76,000 shares in the mills at Rs. 4‑4 as. per share to the petitioner company. Before the date of this agreement the promoters had entered into an agreement with some share brokers to sell a large portion of the shares to be acquired by them in the mills at Rs. 5‑8 as. to Rs. 5‑13 as. per share. 13,74,000 shares were thus sold to third parties by the petitioner‑company and it received a sum of Rs. 16,52,600 in excess of the price paid by it for those shares. The balance of the shares were retained by the petitioner‑company. In its return for the accounting year ending October 31, 1944, the petitioner‑company did not show that any excess of Rs. 16,52,600 was realised by the sale of the 13,74,000 shares, though the fact of sale was stated with a remark that the company had no right to make any profit by sale of shares. Income‑tax and excess profits tax assessments were made without including the Rs. 16,52,600 income. Subsequently, in 1949, the Income tax Investigation Commission; on enquiry, held, that the Rs. 16,52,600 was profit derived from an adventure in the nature of trade and that it was assessable. Thereafter in 1958 and 1959 notices for re‑assessment were served under section 34 (1‑A) of the Income‑tax Act and section 15 of the Excess Profits Tax Act on the ground that the sum of Rs. 16,52,600 had escaped assessment. A notice under section 34 (1) (a) was also issued in 1960. It was contended by the assessee that the notices were issued without jurisdiction:
Held, (i) that it was permissible for the Excess Profits Tax Officer, while issuing the notice dated November 28, 1959, under section 15 of the Excess Profits Tax Act to rely upon the facts which came to light by reason of the proceedings held before the Income‑tax Investigation Commission and the findings made by the Commission. These facts were the facts regarding the re‑sale price of the block of 13,00,000 odd shares and recovery by the petitioners of the sum of Rs. 16,52,600 as excess over the price at which they had purchased the shares and that the re‑sale of these shares was of the nature of a business adventure. As these facts were wholly unknown to his predecessor they must be held to be definite information subsequently acquired by the Excess Profits Tax Officer who issued the above notices.
(ii) Having regard to the total failure of the machinery that had commenced with the Taxation on Income (Investigation Commission) Act and the findings made by the Investigation Commission in the case of the petitioners, there was a clear reason for the Department to commence action by issuing notice under subsection (1‑A) of section 34.
(iii) The issuing of a notice under section 34 (1) (a) in 1960 did not amount to a waiver of the notice under section 34 (I‑A) issued earlier.
(iv) Notices for re‑assessment under section 34 (1‑A) of the Indian Income‑tax Act, 1922, and section 15 of the Excess Profits Tax Act, 1940, were validly issued.
Chuni Lal Nayyar v. Commissioner of Income‑tax (1951) 20 I T R 568 ; Commissioner of Income‑tax v. Janab S. Khaderwalli Sahib (1951) 20 I T R 208; Fazal Dhala v. Commissioner of Income tax (1944) 12 I T R 341 ; Haji Ahmad‑H'aji Esak & Co. v. Commis sioner of Income‑tax (1951) 19 I T R 331 ; Mohideen Thumby & Co. v. Commissioner of Income‑tax (1955) 28 I T R 252 and Suraj Mall Mohta & Co. v. Visvanatha Sastri (1954) 26 I T R 1 ref.
M. M. Jhaveri and Kavarana for Petitioners.
G. N. Joshi and R. J. Joshi for Respondents.
JUDGMENT
In this petition under Article 226 of the Constitution the petitioners claim writ of prohibition and/or directions against the respondents preventing them from enforcing against the petitioners two re‑assessment orders dated July 29, 1961, made respectively under the provisions of section 34 of the Indian Income‑tax Act and section 15 of the Excess Profits Tax Act. The petitioners' main contention is that these orders are illegal, because there is patent want of jurisdiction in the matter of these orders. The substance of the petitioners' contention is that they had disclosed all facts in the first instance and that there was no new information on the basis of which reassess ment proceedings could be commenced.
The facts leading to this petition may be shortly summarised as follows:--
The petitioners are a private limited company which was incorporated on May 6, 1943, with a paid up capital of Rs. 20,00,000. The Apollo Mills Co. Ltd. of Bombay with a capital of Rs. 50,00,100 divided into 25 lakhs share of Rs. 2 each had as its managing agents Messrs E. D. Sassoon & Co. Ltd., who, for the sake of brevity, will be referred to in this judgment as "the Sassoons". They held 19,76,000 shares out of the 25 lakhs. The promoters of the petitioners' company entered into an agree ment with the Sassoons on April 27, 1943, by which the Sassoons agreed to transfer their managing agency of the Apollo Mills for Rs. 1211 lakhs and the whole of their holding of 19,76,000 shares at Rs. 4‑4‑0 per share, i.e., for Rs. 83,98,000, to the pro moters of the petitioners' company. These shares were to be transferred to the petitioners' company which was being floated. By clause (3) of the agreement the sale of the managing agency and the transfer of the shares was agreed to be simultaneously completed. On November 1, 1943, a tripartite agreement was entered into between the Sassoons as assignors, the promoters of the petitioners' company as confirming parties and the petitioners' company as assignees. By that agreement the managing agency rights were formally transferred to the petitioners' company ; so also the share certificates for the whole of the holding of the Sassoons, i.e., 19,76,000 shares of the Apollo Mills, and the neces sary blank transfer deeds were delivered.
Before the agreement of April 27, 1943, the promoters of the petitioners' company entered into an arrangement with some sharebrokers for the sale of a large portion of the total holding of 19,76,000 shares of the Apollo Mills. The price for sale of these shares to the sharebrokers varied from Rs. 5‑8‑0 to Rs. 5‑13‑0. In all, 10,00,000 shares out of the total holding of 19,76,000 shares were sold to these brokers, who sold the same to a number of purchasers. There were further sales and in all 13,74,000 shares were sold to outside parties. For the sale of these shares to outside parties, the petitioners' company received a sum of Rs. 16,52,600 as excess over the price that the petitioners' company agreed to pay and paid to the Sassoons. The balance of the shares continued to be retained by the petitioners' company. By the income‑tax assessment order for the account ing period May 6, 1943 to October 31, 1944, made by B. S. Nadkarni, Income‑tax Officer, Companies Circle 1 (3), Bombay, dated October 30, 1945, the petitioners' company was assessed to income‑tax. He was obviously bound to consider all the petitioners, dealings in connection with the matter of tax liability for the above accounting period. The petitioners' case in paragraph 5 of the petition is that the petitioners' company had disclosed and placed before B. S. Nadkarni the material facts necessary for that assessment and had recorded these facts in their letter to the officer dated October 29, 1945. A copy of the letter is annexed as Exh. B to the petition.
The petitioners have not mentioned relevant facts regarding the excess profits tax assessment made in connection with this very period ending October 31, 1944. The facts which ought to have been mentioned in the petition appear in the affidavit in reply of N. O. Parekh dated July 15, 1963. The peti tioners appear to have proceeded in the petition on the footing that the excess profits tax assessment in respect of the above period was made by B. S. Nadkarni. That, however, is not true. In con nection with the petitioners' liability for the above period to excess profits tax, notices dated December 6, 1945, under section 13 (1) of the Excess Profits Tax Act were issued by B. S. Nadkarni, the then Excess Profits Tax Officer. The petitioners filed two returns both dated December 15, 1945, on or about December 15, 1945. The matter of the petitioners' liability to excess profits tax was not considered by B. S. Nadkarni and it appears that one C. H. Mehta was in charge of the proceedings for the excess profits tax liability. On May 10, 1946, C. H. Mehta wrote to the petitioners requesting them for interview to enable him to complete the excess profits tax assessment. The petitioners were requested to find out the standard profits of the Sassoons for the Apollo Mills agency. The petitioners informed C. H. Mehta that they were unable to get such standard profit of the Sassoons and that they should be given percentage of standard profit. C. H. Meht3 then made excess profits tax assessment order dated October 12, 1946, for the period ending October 31, 1944. That order is not annexed to the petition. A copy of the order is now tendered and is marked Exh. I. The relevant part of the order runs as follows:
"With these remarks the E. P. T. liability is computed as under:
Business income as determined for income‑tax Rs. 1,54,744."
assessment for the period 5‑7‑1943 to 31‑10‑1944
The contents of the above assessment orders and the facts alleged in paragraph 5 of the petition are relevant in connection with the petitioners' contention that all material facts were disclosed to C. H. Mehta and, therefore, there could be no fresh information entitling commencement of re‑assessment proceedings by issuing notice under section 15 of the Excess Profits Tax Act.
Before coming to that notice, it is necessary to mention certain facts that transpired after the above assessment orders were passed. After the Taxation on Income (Investigation Commission) Act, 1947, came into force, the case of petitioners' company was referred to the investigation Commission by the Central Government and the Investigation Commission made its report on November 9, 1949, in Case No. 40~/A. By this report the Commission, inter alia, found:
(1) that a distinction should be trade between the 6,00,000 shares which the petitioners' company intended to and did retain and the 13,00,000 odd shares which it intended to and did sell ;
(2) that from the very beginning the intention of the promoters of the petitioners' company was to sell all the 13,00,000 odd shares and in pursuance thereof they were sold ;
(3) that for payment of price to the Sassoons it was necessary and it was intended to sell the 13,00,000 odd shares, the inference drawn from this by the Commission being that a distinction had to be drawn between the 6,00,000 shares intended to be retained and in fact retained and the 13,00,000 odd shares which it intended to sell and did sell ; and
(4) that the intention to sell which the petitioners' company entertained from the very outset was a complete answer to the argument that the acquisition was in the nature of an invest ment, the Commission's inference being that the sale of 13,00,000 odd shares was an adventure in the nature of trade.
The petitioners brought a reference before this Court and from the decision of the High Court the petitioners also filed an appeal to the Supreme Court. The decisions of both the Courts were against the petitioners. The High Court gave its decision on March 20, 1953, and the Supreme Court on April 12, 1961. After the High Court had given its decision, the question of validity of section 5 of the Taxation on Income (Investigation Commission) Act was argued before the Supreme Court in the case of Suraj Mall Mohta & Co. v. Visvanatha Sastri ((1954) 26 I T R 1). By its decision given in that case on May 28, 1954. the Supreme Court held the provisions of section 5 (4) of the above Act to be ultra vires the Constitution as infringing Article 14. Within short intervals, in other matters which reached before it, the Supreme Court held certain other pro visions of the Act to be ultra vires the Constitution. It appears that to meet with the situation which arose having regard to the above decisions of the Supreme Court, on June 17, 1954, the Central Government enacted Ordinance VIII of 1954 and followed it up with Act XXXIII of 1954. The promulgation of the Ordinance was necessitated by the decision of the Supreme Court in Saraj Mall Mohta's case. The Ordinance and the Act inserted two new subsections into section 34 of the Indian Income‑tax Act. By the new subsection (1‑A), the Income‑tax Officer was authorised to serve a notice on the assessee for re‑assessment of income‑tax if he had reason to believe that profits or gains chargeable to income‑tax had escaped assessment for any year in respect of which the relevant previous year fell wholly or partly within the period beginning on September 1, 1939, and ending on March 31, 1946. It is at this stage un necessary to notice the limitations put on this power by the subsection.
It requires to be noticed that the Income‑tax Investigation Commission had made investigations not only with reference to the above profits of Rs. 16,52,600, but also in connection with another sum of Rs. 4,50,000 relating to cotton transactions of the petitioners. In connection with this last amount, the petitioners had proposed settlement which was acceptable to the Com mission, Final orders had not been passed in respect of that amount by the Commission. In accordance with the finding of the Commission in respect of the above profits of Rs. 16,52,600, on November 19, 1949, the Central Government passed orders for taking action. Re‑assessment proceedings were accordingly started and re‑assessment orders were passed in respect of income‑tax and excess profits tax respectively on January 23, 1950, and February 23, 1950. After the above re‑assessment orders were made recovery proceedings were started and ultimately a sum of Rs. 8,89,000 was recovered by the Department from the petitioners towards their liability under the above re‑assessment orders.
Keeping in mind the judgment of the Supreme Court in Suraj Mall Mohta's case, and in pursuance of the amendment of section 34 of the Indian Income-tax Act, P. Sadagopan, Income‑tax Officer, Central Circle 11‑C, Bombay, served a notice dated March 29, 1956, under subsection (1‑A) of section 34 of the Act for the year ending March 31, 1946, on the petitioners. By this notice he mentioned that he had reason to believe that income, profits or gains assessable to income‑tax for the above year had escaped assessment and that the income that escaped assessment amounted to or was likely to exceed Rs. 1,00,000 or more. He called upon the petitioners to file a return in the form attached to the notice. Thereafter, by two notices each dated November 28, 1959, served on the petitioners under section 15 of the Excess Profits Tax Act for the periods ending October 31, 1943, and October 31, 1944, S. V. Nerurkar, being Excess Profits Tax Officer, Central Circle II‑C, Bombay, recorded that in consequence of definite information that had come into his possession, he had discovered that profits of the chargeable accounting periods chargeable to excess profits tax had escaped assessment and had been under‑assessed and called upon the petitioners to deliver to him returns in the forms attached to the notices for re‑assessment purposes. Thereafter, K. T. Thakore, Income‑tax Officer Central Circle II‑C, Bombay, served four notices dated May 5, 1960, under section 34 (1) (a) on the peti tioners for re‑assessment purposes respectively for the years 1945 to 1949. By these notices he recorded that he had reason to believe that income assessable to income‑tax for these years had escaped assessment and had been under‑assessed. He called upon the petitioners to file returns in the forms attached to the notices for re‑assessment purposes.
Thereafter, the Supreme Court gave its decision on April 12, 1961, in the petitioners' appeal, as already related above. By correspondence that took pip .e in June/July 1961, the petitioners challenged the re‑assessment orders made in January/February, 1950. The petitioners contended that the recovery of Rs. 8,89,000 that had been made was illegal, as the above re‑assessment orders were not binding on the petitioners and were invalid. The petitioners called upon the Department to repay the whole of the amount of Rs. 8,89,000 to the petitioners. In the further corres pondence that took place, the Department accepted the petitioners' contention that the re‑assessment orders made in January/February 1950, were not enforceable. The Department, however, claimed to retain Rs. 8,89,000 and justified that action under section 49‑EE of the Income‑tax Act.
By two letters each dated July 5, 1961, K. C. Thomas, Income‑tax Officer, Central Circle 11‑C, Bombay invited the petitioners' attention to the re‑assessment proceedings that had been started against the petitioners in respect of escaped income tax and escaped excess profits tax liabilities. By these letters, he offered opportunity to the petitioners to be heard in respect of re‑assessment proceedings and fixed a meeting for hearing the petitioners on July 12, 1961. In the correspondence that took place the petitioners' attorneys referred to the above notices for re‑assessments and submitted that the notices were illegal and requested the Income‑tax Officer to inform the petitioners as to whether the proceedings before him were continued under subsection (1‑A) or subsection (1) (a) of section 34. They also requested the officer to give them inspection of the reports made by the officer to the Commissioner in connection with issuance of these notices for reopening assessments. The above requests were refused, but the officer explained that the reference to both the subsections in the notices and in the proceedings was to be understood only in the sense that neither action had been formally dropped.
Hearing was afforded to the petitioners and their attorneys by K. C. Thomas on July 24, 1961, and subsequently, by K. Das Gupta, being the first respondent in this petition, on July 29, 1961. By the impugned assessment orders both made on July 29, 1961, the petitioners were re‑assessed to income‑tax under section 34 (1‑A) of the Indian Income‑tax Act, and excess profits tax under section 14 (1) of the Excess Profits Tax Act. Copies of these orders are annexed as Exh. H‑1 (collectively) to this petition. By the order re‑assessing the petitioners to excess profits tax, the officer recorded the following:
"The assessee's contentions that the notices under section 15 of the Excess Profits Tax Act have been issued without jurisdiction and beyond the prescribed period are not accept able because there is `definite information' available from the report of the Income‑tax Investigation Commission that the profit on sale of Apollo Mills' shares had escaped assessment and because there is no time limit for issue of notice under section 15 of the Excess Profits Tax Act."
By the impugned income‑tax assessment order the Income tax Officer found that Rs. 16,62,000 was a trading profit of the petitioners and as such was liable to be included in the income of the petitioners. On that very footing, the excess profits tax liability of the petitioners was determined.
As regards the above notices and the assessment orders, at the hearing of this petition, two contentions have been made on behalf of the petitioners. The first contention of the peti tioners is based on the provisions of section 15 of the Excess Profits Tax Act, the relevant part whereof runs as follows:
"15. Profits escaping assessment.‑If, in consequence of definite information which has come into his possession, the Excess Profits Tax Officer discovers that profits of any charge able accounting period chargeable to excess profits tax have escaped assessment, or have been under‑assessed, or have been the subject of excessive relief, he may at any time . . . . serve on the person liable to such tax a notice containing all or any of the requirements which may be included in a notice under section 13, and may proceed to assess or reassess the amount of such profits liable to excess profits tax . . . "
The contention of the petitioners was that the notices dated November 28, 1959, which were issued under this section have been issued without the existence of the necessary conditions precedent and accordingly the first respondent bad no jurisdiction to reassess the petitioners to excess profits tax liability as he has done by the order dated July 29, 1961. In support of this contention, the petitioners argued that they had made a full and true disclosure of all material facts to the Excess Profits Tax Officer (C. H. Mehta), who, in the first instance, made the assessment order dated October 30, 1945. The contention was that C. H. Mehta, who made the second order dated October 12, 1946, knew all relevant facts as regards the transaction of re‑sale of 13,00,000 odd shares by the petitioners to third parties. As these facts were in the first instance disclosed by the petitioners, there were no new facts or definite information, in consequence of which the notices dated November 28, 1959, could be issued under section 15 of the Excess Profits Tax Act. According to the petitioners, there was neither "definite information" nor discovery as necessary for issuing a notice of re‑assessment under section 15 of the above Act.
As regards these contentions, it is first necessary to find out as to what information or materials were with C. H. Mehta who passed the excess profits tax assessment order dated October 12, 1946. The averments in the petition in that connection are entirely vague. In fact, the petition proceeds on the footing that the above assessment order was made by B. S. Nadkarni, Reference is not made in the petition to C. H. Mehta at all. The only averments, on which reliance can be placed in this connection by the petitioners, are contained in paragraph 5 of the petition and the submission in paragraph 18, where it is stated that "the petitioners say that they had made a full and true disclosure of all material facts necessary for their assessment at the time of the original assessment . . . " In paragraph 5 also the averment is: ". . . Excess Profits Tax Officer (reference being to Shri B. S. Nadkarni) . . . . did not include the sum of Rs. 16,52,600 in the total income of the petitioners on the basis that the amount realised by sale of Rs. 13,74,000 shares of the Apollo Mills was not revenue profit and that the same was, therefore, not taxable as such, after the petitioner company had disclosed and placed before him all material facts necessary for their assessment, and recorded them in their letter to him dated the 29th October 1945". It is difficult to avoid observing that the petitioners have intentionally kept the whole petition vague as regards the information that they conveyed to the Excess Profits Tax Officer, C. H. Mehta. They failed to refer to him altogether. Even if it was their mistake in referring to B. S. Nadkarni in connection with this order, what they have…
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