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Petitioner: ASSOCIATED STONE INDUSTRIES (KOTAH) LTD VS Respondent: COMMISSIONER OF INCOME- JUDGMENT
Court Name: Supreme Court of India Judge(s): K. S. Paripoornan, B. P. Jeevan Reddy Title:ASSOCIATED STONE INDUSTRIES (KOTAH) LTD vs COMMISSIONER OF INCOME-
JUDGMENT
Reported As: 1997 PTD 1810 Result: Order accordingly Judgment JUDGMENT ' K. S. PARIPOORNAN, J.---The appellant is a public limited company. It was incorporated in the then Indian State of Kotah on January 17, 1945, for carrying on the business of quarrying stones. It is an assessee to income-tax. This appeal is filed in pursuance of the certificate of fitness granted by the High Court of Rajasthan. Jaipur Bench, dated November 26, 1979, arising out of the judgment and order, dated July 30, 1979, in Income-tax Reference No, 24 of 1970. The said judgment is reported in CIT v. Associated Stone Industries (Kotah) Ltd. (1981) 130 ITR 868. The High Court considered the validity of the reassessm ents made on the appellant for the years 1950-51 to 1956-57 as also the legality of the assessm ents made for the years 1957-58 to 1961-62 in its common judgment, dated July 30, 1979 (ITR No, 24 of 1970). In deciding the legality and validity of the reassessments for the years 1950-51 to 1956-57 some aspects were decided in favour of the assessee/appellant. On a consolidated reference made by the Income-tax Appellate Tribunal in respect of the assessment years 1950-51 to 1961-62, seven questions of law were referred for the decision of the High Court. Out of the same the following five questions of law, namely, questions Nos.1 , 2, 5, 6 and 7, which were answered against the assessee, are still in appeal before us: "(1) Whether, on the facts and in the circumstances of the case, the reassessments for the years 1950-51 to 1956-57, were 'validly made under section 34(1)(a) of the Indian Income-tax Act, 1922? (2) Whether, on the facts and in the circumstances of the case, the Revenue was entitled to contend that reassessm ents for the years 1954-55, 1955-56 and 1956-57 were validly made under section 34(1)(b) of the Act?
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(3) Whether an appeal can lie against an order levying penal interest under section 18-A of the Act for the assessm ent years 1957-58 to 1961-62? (4) Whether the assessee-company was entitled to a credit of the tax and super-tax liability of the company? (5) Whether, on the facts and in the circumstances of the case, the payment of royalty in excess of Rs,1,50,000 paid under clause 18 of the lease granted by the Government of His Highness the Maharao Saheb of Kotah, on May 2, 1945, which has been held to be in lieu of income-tax, super-tax etc., by the District Judge, Kotah, is a permissible deduction in the assessment years 1957-58 to 1960-61?" ' At this stage, it should be mentioned that the assessee has filed Special Leave Petition No, 10840 of 1980, by way of abundant caution against the very same judgment of the High Court to be considered in case the certificate granted by the High Court is found to be defective or unsustainable. It is unnecessary to consider the said special leave petition on the merits separately. ' We heard counsel. ' The relevant facts for deciding the controversy involved in this appeal are not in dispute. The High Court has summarised them correctly in its judgment as follows : ' The then Maharao of Kotah State granted a lease to the assessee company on May 2,1945, for a period of 15 years beginning from October, 1944. Clause 18 of the lease agreement entered into by the assessee-company with the then Maharao of Kotah for quarrying flooring stones was as under: "18. (i) In consideration of the concessions and privileges granted by the grantor and in lieu of income-tax, super tax and excess profits tax, the grantee covenants to pay to the grantor royalty on the stone excavated at the rate of rupee one per 100 sq. Ft., subject to the minimum amount of Rs,1,50,000 per financial year, provided that the aforesaid rate of Re.1 per 100 sq. Ft., will be operative so long as the selling rate of unpolished slabs does not exceed Rs,10 per 100 sq. Ft.; in the event of the selling rate going above this figure the royalty per 100 sq. Ft. Shall be increased by 25 per cent. Of the excess over ten rupees. (ii) The minimum royalty will be payable in four equal instalments in advance every quarter. Provided that if in any quarter the royalty payable calculated at the rate mentioned in sub- paragraph (i) exceeds the instalment of minimum royalty paid in advance for that quarter, the balance shall be made up within the next quarter." ' The Kotah State merged with the United State of Rajasthan and the Indian Income-tax Act, 1922, was brought into force in the newly formed State of Rajasthan with effect from April 1,- t950. The assessee-company submitted an application to the Commissioner of Income-tax for a declaration that it was exempt from the payment of income-tax in accordance with the terms of the lease granted to it by the then Maharao of Kotah. But the aforesaid application was rejected. Thereafter, the assessee-company filed a civil suit in the Court of the District Judge, Kotah, against the Union of India and the State of Rajasthan, seeking a declaration that it was exempt from payment of income-tax and that the royalty paid by it in excess of the minimum amount of Rs,1,50,000 was in lieu of income-tax, super-tax, etc. The learned District Judge by his decree and order, dated August 23, 1957, held that the royalty which was paid by the assessee-company to the State of Rajasthan, in accordance with the provision of clause 18 of the grant, consisted of two parts, namely, the sum of Rs,1,50,000 represented royalty proper, while the remaining amount of royalty paid by the assessee-company was in lieu of income-tax, super-tax and excess profit-tax. According to the learned District Judge, the State of Rajasthan was entitled to the minimum royalty of Rs,1,50,000 as, according to him, the said amount was attributable to the concessions and privileges granted by the Government to the assessee-company, while the remaining amount paid by the assessee company, in excess of Rs,1,50,000, was further divisible into two parts consisting of
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the amount paid in lieu of income-tax, super-tax and excess profits tax, which was payable to the Union of India by way of Federal taxes on income or profits, while the amount left by way of residue, out of the amount paid by the assessee-company' under clause 18 of the grant after the deduction of the income-tax, super tax and excess profits tax, shall be payable to the State of Rajasthan. Thus, the State of Rajasthan was held entitled to the minimum royalty amount of Rs,1,50,000 while the Union of India was held entitled to the amount equal to the tax liability of the assessee company in respect of the Federal taxes out of the excess royalty paid in that year, and the State of Rajasthan was entitled to the residue left out of the total amount paid by the assessee-company under clause 18 of the grant. The learned District Judge, however, dismissed the suit against the Union of India. The order passed by the learned District Judge, Kotah, had no binding effect so far as the Union of India is concerned. ' The Income-tax Officer, in the assessments for the years 1950-51 to 1956-57, disallowed the deduction of the minimum royalty amount of Rs,1,50,000 from the taxable income of the assessee- company on the ground that the same was capital expenditure, while deduction of royalty paid by the assessee-company in excess of Rs,1,50,000 was allowed. The same position was maintained by him in respect of the assessm ents for the assessment years 1957-58 to 1961-62. In the year 1959, notices for reassessm ent of tax, under section 34(1)(a) of Indian Income-tax Act, 1922, were issued for the assessm ent years 1950-51 to 1956-57. The Income-tax Officer reassessed the income of the assessee-company for the years 1950-51 to 1956-57 and held that as the amount of royalty paid by the assessee-company in excess of the sum of Rs,1,50,000 was in lieu of income-tax etc., the same could not be allowed as deduction to the assessees-company and as such the amount of excess royalty allowed earlier as deduction was disallowed and was added back to the income of the assessee-company. The assessee-company preferred appeals before the Appellate Assistant Commissioner against the aforesaid orders of reassessment passed by the Income-tax Officer, Kotah. But the appeals were dismissed. Then the assessee-company filed appeals before the Income-tax Appellate Tribunal, which disposed of the seven appeals relating to the reassessment proceedings made under section 34(1)(a) of the Act, for the assessment years 1950-51 to 1956-57, by one consolidated order, dated September 7, 1968. The Tribunal held that the proceedings under section 34 of the Act could not be initiated in view of the decision of the Supreme Court in Calcutta Discount Co. Ltd. v. I.T.O. (1961) 41 ITR 191. It was held by the Tribunal that the assessee-company had disclosed all relevant or material facts and as there was no failure on the part of the assessee- company to disclose fully and truly any relevant material necessary for the assessment in respect of the years in question, the necessary pre-requisite conditions for invoking the jurisdiction for reassessm ent under section 34(1)(a) of the Act were absent. The Tribunal further held that the proceedings for reassessm ent for the assessment years 1954-55, 1955-56 and 1956-57, although initiated within a period of four years from the date of the original assessment for those years, yet because such proceedings were initiated under section 34(1)(a) of the Act, they could not be upheld as having been made under section 34(1)(b) of the Act. The Tribunal also held that the portion of the excess royalty paid by the assessee-company to the State Government, which was equivalent to the tax liability of the assessee-company, could not be held 'as permissible deduction, as the income-tax and other taxes were payable to the Union Government. However, the remaining portion of the excess royalty, which was left out by way of residue, after deduction of the amount paid in lieu of tax liability by the assessee-company, out of the excess royalty, was permissible deduction on the basis of the principles laid down by their Lordships of the Supreme Court in Gotan Lime Syndicate v. CIT (1966) 59 ITR 718. It was further held by the Tribunal that the royalty paid on polished stones, in accordance with the provisions of clause 19 of the agreement, constituted a part of the cost of the stones and is a permissible deduction, being an expenditure of revenue nature. The Tribunal lastly held that the assessee-company was entitled to the credit of
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that portion of the royalty, which was paid by it in lieu of income-tax and super-tax liability of the assessee-company. ' By another order passed on September 7, 1968, the Tribunal allowed the appeals preferred by the assessee-company in respect of the assessment years 1957-58 to 1961-62, holding that a sum of Rs,1,50,000, as the minimum amount of royalty payable by it, was expenditure of revenue nature and was a permissible deduction and that out of the excess royalty paid by the assessee- company, the residue left, after payment of the amount equivalent to income-tax, super-tax, etc., to the Union Government, was also revenue expenditure and was a permissible deduction, although the amount of excess royalty representing its liability in respect of income-tax, super-tax and other direct taxes payable to the Union of India could not be deducted from the taxable income of the assessee-company, adopting the reasoning given by it in the earlier order passed on the same day, which has been referred to above. ' are concerned only with the answers given by the High Court regarding questions Nos. 1, 2, 5, 6 and 7, which are against the assessee. On question No, 1, the High Court held that the reassessment proceedings for the years 1950-51 to 1956-57 were initiated and concluded validly under section 34(1)(a) of the Act. On question No, 2, concerning the assessment years 1954-55, 1955-56 and 1956-57, the High Court found on the alternate plea, that the reassessments of the appellant- company for the said years could be justified under section 34(1)(b) of the Act. On question No, 5, the High Court held that the penal interest calculated and charged under section 18(6) or 18-A(8) could only be challenged in an appeal against the order of assessment to tax and the assessee would be entitled to deny his liability to payment of penal interest also while denying his liability to be assessed to tax under the Act. It also agreed with the view expressed by the Allahabad, Andhara Pradesh, Madras, Karnataka, Gujarat, Gauhati and Bombay High Courts which held that no appeal lies against the order levying penal interest. The matter was left vague, without applying the law laid down by the High Court, to the facts of the case. On question No, 6, the High Court held that the assessee-company was not entitled to get credit for any amount of the excess royalty. On question No, 7, it was held that the expenditure being not one of a revenue nature cannot be a permissible deduction in the relevant assessm ent years. ' We shall consider the above questions of law answered by the High Court (questions Nos.1, 2, 5, 6 and 7) seriatim. ' Question No 1 relates to the legality and validity of the reassessments made for the years 1950-51 to 1956-57 under section 34(1)(a) of the Indian Income-tax Act, 1922. Section 34(1)(a) and (b) of the Act are to the following effect: "34 Income escaping assessm ent.-(1) If- (a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed; or (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessm ent for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee ... a notice..."
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' It is evident that two conditions should be fulfilled to exercise jurisdiction under section 34(1)(a) of the Act. (1) The Income-tax Officer should have reason to believe that income has escaped assessment and (2) he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessm ent for the relevant year. It is now well-settled by the decision of this Court that the duty of the assessee is only to fully and truly disclose all material facts. The expression "material facts " contained in section 34(1)(a) of the Act refers only to primary facts, and the duty of the assessee is to disclose such primary facts. There is no duty cast on the assessee to indicate or draw the attention of the Income-tax Officer what factual or legal, or other inferences can be drawn from the primary facts disclosed. (see Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191). In this case, the Appellate Tribunal found in paragraph 12 of its order: "The primary fact in this case was the lease agreement and the terms and conditions thereof. This was before the Income-tax Officer from the beginning. He was aware of the triangular dispute between the assessee-company, the State of Rajasthan and the Union Government pending before the District Court, Kotah. He was served with an interim injunction to refrain from proceedings with the assessm ents. He had got the said injunction modified. In these circumstances, the charge against the assessee-company that it had omitted or failed to fully and truly disclose any material fact fails completely. We are, therefore, of the opinion that the Income- tax Officer did not have any material whatsoever to have some reason to believe that as a reason of omission or failure on the part of the assessee-company to fully and truly disclose any relevant material necessary for its assessments for the years under appeal, income had escaped assessm ent. In other words, we hold that the material condition requisite for invoking jurisdiction under section 34(1)(a) was absent. We, therefore, hold that the reassessments completed under section 34(1)(a) are without jurisdiction and are, therefore, liable to be cancelled." ' On the other hand, the High Court has taken a different view of the matter by stating that the Income-tax Officer was not a party to the suit filed by the appellant, that a copy of the plaint filed in the Court was not submitted to him and the assessee-company failed in its duty to make a pointed reference to the particular portion of the document, namely, clause 18 of the lease agreement, dated May 2, 1945,. And in this view of the matter held thus: "Thus, we are satisfied that the Tribunal was not correct in holding that the assessee-company did not fail to disclose all material relevant or primary facts and the mere production of the lease agreement or some vague awareness on the part of the Income-tax Officer about the triangular dispute between the assessee, the State of Rajasthan and the Union of India before the District Judge, Kotah, and the service of the interim injunction upon him, cannot lead to an inference that the Income-tax Officer was aware as a matter of fact that the amount paid by the assessee- company under the lease agreement consisted not only of royalty proper but also some amount was paid in lieu of income-tax and other taxes." ' In this view, it was held that the assessee-company failed to disclose all material or primary facts and so the proceedings under section 34(1)(a) of the 1922 Act were validly initiated and concluded. We are of the view that the approach and conclusion so made by the High Court are patently erroneous for the following reasons. ' The primary fact in this case is the lease agreement entered into by the appellant with the Maharao of Kotah State dated May 2, 1945. It was placed before the Income-tax Officer at the time of original assessm ents. It is not the duty of the assessee to draw the attention of the Income-tax Officer to any particular clause or portion of the document and invite him to draw any particular inference therefrom. Moreover, in the suit the Union of India and the State of Rajasthan were parties. The interim injunction passed by the Court from assessing or levying any income-tax
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against the assessee company was varied on the representation made by the Union of India, by later orders. Indeed, the Union of India and the Commissioner of Income-tax have filed written statements in the suit. The order of injunction was within the knowledge of the Income-tax Officer, as could be seen from the original assessments. The Income-tax Officer was aware of the triangular dispute between the assessee-company, the State of Rajasthan and the Union of India pending before the District Court. What is more, the order of injunction to refrain from proceeding with the assessm ents was served on the Income-tax Officer which was later modified. In view of these salient features, the High Court totally erred in holding that there was any omission on the part of the appellant-company to fully and truly disclose material or primary facts necessary for the assessm ents for the years in question. We, therefore, hold that the answer given to question No, 1 by the High Court that the reassessment proceedings initiated under section 34(1)(a) of the Act were valid for the years 1950-51 to 1956-57, is totally erroneous in law. We set aside the said finding and hold that the reassessm ent proceedings for the assessment years 1950-51 to 1956-57 under section 34(1)(a) of the Act were invalid. ' We shall now consider question No, 2 as to whether the revenue could contend or defend the reassessm ents for the years 1954-55, 1955-56 and 1956-57 as validly made under section 34(1)(b) of the Act ? ' The High Court has held on question No, 2 that the reassessments of the appellant-company for the said three years were justified under section 34(1)(b) of the Act. We have noticed in the earlier portion of the judgment that a civil suit was filed in the Court of the District Judge, Kotah, by the appellant-assessee against the Union of India and the State of Rajasthan, seeking a declaration that it was exempt from payment of income-tax and that the royalty paid by it in excess of the minimum amount of Rs,1,50,000 was in lieu of income-tax, super-tax etc. Construing clause 18 of the grant, the District Judge held that the amount paid by the assessee consisted of two parts, namely, the sum of Rs,1,50,000 represented royalty proper, while the remaining amount, i,e,, the amount paid over and above Rs,1,50,000 represented the amount in lieu of income-tax, super-tax and excess profits tax. The State of Rajasthan was held entitled to Rs,1,50,000 which was attributable to the concessions and privileges granted by the Government to the appellant- company. The amount paid in excess of Rs,1,50,000 was further divisible into two parts. One part representing the amount paid in lieu of income-tax, super-tax and excess profits tax, which was payable to the Union of India and the residue out of the amount paid by the assessee-company under clause 18 of the grant after the deduction bf the income-tax, super-tax and excess profits tax, shall be payable to the State of Rajasthan. The State of Rajasthan will be entitled to the residue. The District Judge, however, dismissed the suit against the Union of India. In the appeal filed by the State of Rajasthan, it was held that the agreement, dated May 2, 1945, became void on the coming into force of the Constitution of India on January 26, 1950, that the amount paid by the assessee- company in excess of the minimum of Rs,1,50,000 was refundable to it.-The Income-tax Officer held that the amount of royalty paid by the appellant-company in excess of Rs,1,50,000 being in lieu of income-tax, super-tax and excess profits tax could not be allowed as deduction. In the reassessm ent proceedings, the amount of excess royalty allowed earlier as deduction was disallowed and added back to the income of the assessee-company. The appeals filed by the appellant-assessee before the Appellate Assistant Commissioner were dismissed. The Appellate Tribunal held that the proceedings are invalid under section 34(1)(a) of the Act for the years 1950- 51 to 1956-57 and alternatively that the proceedings for reassessment for the years 1954-55, 1955- 56 and 1956-57 though initiated within a period of four years from the date of the original assessm ent for those years, could not be sustained under section 34(1)(b) of the Act, since the proceedings were initiated under section 34(1)(a) of the Act. The Tribunal also held that the portion of the excess royalty paid by the assessee-company to the State Government which was
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equivalent to the tax liability of the assessee-company is not a permissible deduction as the taxes were payable to the Union Government. It was further held that, however, the remaining portion of the excess royalty which was left out by way of residue, after deducting the amount paid in lieu of tax liability by the assessee-company (out of the excess royalty), was a permissible deduction. In the High Court it was not disputed that reassessment proceedings for the year 1954-55, 1955-56 and 1956-57 were taken within a period of four years from the date of completion of the original assessm ent proceedings and so they could have been validly made under section 34(1)(b) of the Act. Nor was there any dispute before the High Court that the amount, of royalty paid over and above the minimum royalty amount of Rs,1,50,000 was paid in lieu of income-tax, super-tax and excess profits tax and the amount which was so paid cannot be claimed as exempt from payment of income-tax. It was the income of the assessee-company and was chargeable' to tax and which had, as a matter of fact, ascaped assessment at the time of the completion of the original assessm…
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