SAHNEY STEELS AND PRESS WORKS LTD. v. INCOME TAX OFFICER
[Citation -1984-LL-0530-1]

Citation 1984-LL-0530-1
Appellant Name SAHNEY STEELS AND PRESS WORKS LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 30/05/1984
Assessment Year 1969-70, 1970-71
Judgment View Judgment
Keyword Tags non-disclosure of primary facts • reassessment proceedings • income chargeable to tax • liability to pay royalty • collaboration agreement • additional information • cessation of liability • judicial pronouncement • technical information • appropriate authority • non-resident company • period of limitation • product manufactured • deduction of royalty • technical assistance • initial depreciation • plant and machinery • payment of royalty • technical know-how • company law board • reason to believe • managing director • mutual agreement
Bot Summary: In terms of the agreement the assessee was to pay to the English Company commission for the term of the agreement in consideration of their providing technical assistance to the assessee relating to the manufacture of the articles mentioned above and also in consideration of their assisting the assessee in their promotion of selling activities. The foreign company was also to give technical information to the assessee as to the type of plant and machinery that was required to be set up for the manufacture and technical data to be supplied and the assessee was also to be given tools and inspection gauges. The learned counsel specifically drew our attention to the statement in the letter of the solicitors that there was a consultation with them some years earlier in respect of the question of the assessee's liability of payment of royalty and that they had advised the assessee in similar terms. Regarding the plea of the learned counsel that the assessee had offered the entire amount of royalty payable for assessment in the year 1974-75 on the ground that the remission took place in that year, the submission of the learned Departmental Representative was that the amounts had to be assessed in the year in which remission took place and if assessment of amounts under s. 41(1) or disallowances of royalty claimed was upheld in any earlier year, it will be open to the assessee to seek for appropriate relief for the asst. There is no such material.... The aforesaid observations, in our view, only go to show that where an assessee was not aware of a particular fact, it could not be stated that there was omission on the part of the assessee to disclose the fact. We may mention that a contention was put forth that the assessee had secured legal advice and it was on the basis of legal advice that the assessee had continued to claim royalty payable, that the legal advice was that the agreement did not stand terminated and would have to spend itself by efflux of time. In view of the categorical stand taken by the assessee in the letter referred to, we cannot come to a finding different from that arrived at by the earlier Bench that having regard to the correspondence by mutual consent, the agreement of 1962 between the English Company and the assessee was terminated in August 1968, releasing the assessee from the obligation to pay the royalty.


GEORGE CHERIYAN, A.M.: ORDER Assessment years 1969-70 to 1971-72 These three appeals are preferred by assessee and they relate to asst. yrs. 1969-70, 1970-71 and 1971-72. For sake of convenience, appeals are considered together and are disposed of by this order since common contentions are involved. 2. assessee is company. accounting period is calendar year preceding relevant assessment year. In each of appeals assessee contests finding of CIT(A) upholding validity of proceedings taken under s. 147(a) of IT Act, 1961 ('the Act'). assessee entered into agreement with Wood Auto Suppliers Ltd. of United Kingdom (English Company) dt. 5th July, 1962. English Company were manufacturers of armatures, field coils, etc., which were being sold by them in India under name of Wood Auto. assessee had acted as agents of English Company in past as seen from agreement. assessee sought to have benefit of technical assistance from English Company and English Company agreed that they would not export to India articles referred to therein under trade name of Wood Auto. In terms of agreement assessee was to pay to English Company commission for term of agreement in consideration of their providing technical assistance to assessee relating to manufacture of articles mentioned above and also in consideration of their assisting assessee in their promotion of selling activities. There were various other clauses in agreement. Suffice it to say that commission or royalty was payable at rate of 3 1/2 per cent of sale price of articles mentioned, computed and certified in manner specified under cl. 2 of agreement. agreement in terms of cl. 8 was to remain in force for period of 7 years from first sale of specified articles. clause also provided for agreement being terminated on happening of certain contingencies. There was also provision that agreement could be terminated by giving three months' notice in writing to assessee, if English Company was not satisfied with articles supplied or they did not measure up with standard. There was also cl. (cl. 14) which stated that agreement should be construed in all respects in accordance with English law and parties submitted themselves in terms of this clause to jurisdiction of English Courts. On behalf of English Company agreement was signed by one Reginald Wood, director, and on behalf of assessee agreement was signed by Trilochan Singh, director. Purportly in terms of such agreement assessee had claimed and was also allowed, in original assessments for assessment years now under consideration as deduction, royalty which was claimed as payable. In terms of agreement only actual payment of royalty made to English Company by assessee was Rs. 10 ,729 during period February 1964 to November 1964. According to assessee, amounts of royalty payable, which were claimed as deduction in assessment years commencing from 1965-66 (excluding solitary amount of actual payment already referred to), were as under : Asst. yr. Amount of royalty claimed . Rs. 1965-66 2,563 1966-67 33,969 1967-68 53,943 1968-69 69,592 1969-70 74,861 1970-71 74,060 1971-72 85,288 1972-73 10 ,313 Thus, in assessment years now under appeal, i.e., 1969-70, 1970-71 and 1971-72, in assessments as originally made amounts of Rs. 74,861, Rs. 74,060 and Rs. 85,288 which stood as debits in P & L a/c were allowed as deductions. In course of time there was certain correspondence between ITO on one hand and English Company on other and based on information contained in letters of English Company ITO considered that provisions of s. 147(a) were attracted. Accordingly, reasons were recorded before initiating such action and specimen of reasons recorded which were in similar terms for each of assessment years has been set out in common order of CIT(A) and is as under : " By virtue of agreement dt. 5th July, 1962 entered into by assessee-company with M/s Wood Auto Suppliers Ltd., England, for purposes of obtaining technical know-how, assessee has agreed to pay royalty at three and half per cent of sales of armatures and field coils. agreement was operative for 7 years from 12th Feb., 1964 to 12th Feb., 1971. Even though assessee has been year after year debiting P & L a/c with royalty payable to foreign collaborator, assessee has not remitted sums to non-resident. opening credit balance in account of M/s Wood Auto Suppliers Ltd., England, in previous year relevant to asst. yr. 1969-70 is Rs. 1,60,067 and amount debited to P & L a/c of year is Rs. 74,861 towards said royalty payable. On enquiry with non-resident company it has been ascertained that agreement was terminated by issue of letter dt. 6th Aug., 1968 by non-resident company and that both parties have agreed to effect that there would be no claim from either party regarding payment of royalty. assessee has not brought to Department's notice about termination of agreement or about cessation of liability. Therefore, deduction of sum of Rs. 74,861 from income of year was wrong and sum of Rs. 1,60,067 was omitted to be included in total income of year under s. 41(1). I have reason to believe that, by reason of omission or failure on part of assessee to disclose fully and truly all material facts necessary for company's assessment for asst. yr. 1969-70, income chargeable to tax has escaped assessment for asst. yr. 1969-70. I request sanction of CIT for issue of notice under s. 148 for asst. yr. 1969-70. " After obtaining approval of CIT, notice under s. 147(a) was issued. Such notice for each of assessment years under appeal was duly served on 20th March, 1978. It may be mentioned at this stage that for asst. yr. 1972- 20th March, 1978. It may be mentioned at this stage that for asst. yr. 1972- 73, ITO had disallowed claim for royalty pertaining to that year and he had also added back by invoking provisions of s. 41(1) of Act, amount of Rs. 3,94,276 representing accumulated royalty for earlier years. These additions were subject of context before AAC and later before Tribunal. Tribunal passed its appellate order for asst. yr. 1972-73 in IT Appeal No. 1506 (Hyd) of 1975-76, dt. 31st Aug., 1977. relevant extract from this appellate order of Tribunal is as under : " assessee entered into agreement with M/s Wood Auto Suppliers Ltd. of United Kingdom on 5th July, 1962 according to which, foreign company was to provide assessee technical information in regard to manufacture of armatures and field coils and to assist it in promotion of sales. foreign company was also to give technical information to assessee as to type of plant and machinery that was required to be set up for manufacture and technical data to be supplied and assessee was also to be given tools and inspection gauges. In return for above services, assessee was to pay foreign company royalty at three and half per cent on sales of armatures and field coils manufactured by it, for purpose of which, sales should be certified half-yearly on 14th May and 14th November by firm of chartered accountants. agreement was to be in force for period of seven years and it could be terminated by three months' notice given in writing. On basis of this agreement, assessee had been claiming some amounts of royalty payable to foreign company every year by debiting P & L a/c and amounts so claimed were allowed in relevant assessment years, up to 1971-72. For asst. yr. 1972-73, assessee claimed sum of Rs. 10 ,313 on similar basis. During course of assessment proceedings, ITO found that assessee, though debited royalty payable to foreign company every year in all past years, nothing was remitted except for sum of Rs. 10 ,729 during period February 1964 to November 1964 of which tax deduction of Rs. 5,365 was made. On writing to foreign company ITO came to know that agreement for payment of royalty was terminated as early as 6th Aug., 1968 and this was evidenced by letter sent by Company to New Indo Trading Company in which one of directors of assessee- company was interested. This letter read as follows : ' In consequence of your visit to our office during July it is confirmed that above mentioned agreement signed on 5th July, 1962, between Wood Auto Supplies Ltd. and Sahney Steel & Press Works Ltd. be considered terminated. This relieves you of any payment for royalties. It also means that under no circumstances are you to use name 'Wood Auto' either in advertisements, copy or on cartons, or in any other way to connect 'Wood Auto' with 'Auto Sahn' products'. assessee wrote on 20th Nov., 1968 confirming termination of agreement. As result of termination royalty debited to P & L a/c and credited to foreign company's account in earlier years was certainly not payable to said company, but assessee, instead of writing off liability in foreign company's account in accounting year 1968, wrote it off in 1974 by crediting P & L a/c. It was contended before ITO that since period of agreement was seven years which ended on 15th Feb., 1971 and during which foreign company could always claim royalty payable to it, assessee waited for another three years to cover period of limitation before writing off liability in books. ITO was not satisfied with explanation. He held that agreement ended in accounting year relevant for this assessment year and since liability to pay royalty was completely remitted by foreign company and liability was allowed as deduction in earlier assessments, entire sum of Rs. 3,94,276 representing accumulated liability for royalties in earlier years, should be treated as income to assessee under s. 41(1) of Act for this assessment. He, accordingly, added back Rs. 3,94,276. In appeal, AAC held that since agreement was terminated as far back as August 1968, liability ceased in that year itself. If liability for royalty credited to foreign company's account was to be added back in assessment under s. 41 of Act, it should be done for asst. yr. 1969-70 and not for present assessment year. He has also observed that ITO has himself reopened assessment for 1970-71 and added royalty payable for that year as per assessee's claim. He, accordingly, deleted addition in question from assessment. Before us, Departmental Representative has relied on observations of ITO while for assessee, reliance has been placed on order of AAC. In our opinion, AAC was correct in view he has taken. It is clear from correspondence placed before us to which reference was made by A C , that by mutual consent agreement of 1962 between foreign company and assessee was terminated in August 1968, releasing assessee-company from obligation to pay royalty. In fact, except for sum of Rs. 10 ,729, assessee did not pay any royalty to foreign company on basis of agreement in earlier years though claim was made and allowed as deduction for royalty payable on basis of agreement. When once agreement was terminated in 1968 there was no point in assessee contending that agreement was for period of seven years which ended in 1971 during which foreign company could always demand payment. cessation of liability referred to in s. 41(1) of IT Act, 1961, took place in 1968 itself. Therefore, royalty payable for that year and earlier years and claimed as deduction by assessee could be added back in assessment in terms of that section. If royalty was claimed and allowed in subsequent years, i.e., 1969 and 1970, it was incorrect claim made by assessee and there may be case for reopening assessments relevant for those two years. But, certainly there is no case for adding back entire liability up to 1971 in assessment for 1972-73 in terms of s. 41(1) of Act. We, accordingly, uphold order of AAC in deleting addition." 3 . In appeal before CIT(A), for assessment years now under consideration, assessee had contested validity of initiation of proceedings under s. 147(a). CIT(A) referred to reasons for reopening as recorded by ITO to which we have adverted earlier as well as findings of Tribunal on arguments in contesting appeal for asst. yr. 1972-73. CIT also adverted to contention urged on behalf of assessee before him, viz., that truth or falsity of transaction was not primary fact but only inferential fact. He has relied in his order on judicial pronouncements cited in support of this proposition. substance of argument before CIT was that there was no non-disclosure of any primary facts by assessee and, therefore, initiation of proceedings under s. 147(a) was void. CIT did not accept plea of assessee and eventually recorded findings in paragraphs 6 and 7 of his order as under : " 6. I consider that appellant suppressed fact that obligation to pay royalty ceased on 6th Aug., 1968 when Wood Auto Suppliers Ltd. confirmed that agreement dt. 5th July, 1962 should be considered as terminated. It was only when this letter was detected that ITO discovered suppression and consequent escapement of income. Reassessment proceedings are fully justified and are upheld. 7. Sri Ratnakar was fair enough to admit that apart from validity of reassessments, there can be no further arguments on merits since Tribunal's order relating to asst. yr. 1972-73 had become final. amounts brought to reassessment will, therefore, stand confirmed for all three years in respect of royalties and profit under s. 41(1). " 4 . learned counsel for assessee submitted that CIT was in error in coming to conclusion that he did. He submitted that whether there was non-disclosure or not of any primary facts had to be considered in light of ratio of judgment of Allahabad High Court in case of Modi Spg. & Wvg. Mills vs. ITO 1975 CTR (All) 44 : (1975) 10 1 ITR 637 (All). In other words, he contended that degree of information which has to be furnished by assessee was different at different stages and at particular stage of assessment proceedings assessee would be bound only to disclose such facts and furnish such particulars as Act obliged him to disclose. In particular he referred to observations of their Lordships about degree of disclosure to be made at different stages which is as under : "... scheme underlying these sections seems to indicate that to begin with, at time of filing of return, assessee was merely required to furnish particulars of his income in prescribed form. In other words, he was to truly and fully supply information sought for in various columns of prescribed form of return. If ITO felt that information conveyed, as per prescribed form, was correct and was sufficient for making assessment order, he could proceed to assess person filing return on its basis. At that stage no question of assessee furnishing any information other than that required to be furnished in prescribed form of return could arise. Accordingly, if assessee truly and fully disclosed all information required to be supplied in prescribed form of return, no question of his failure to disclose any other particulars of his income at that stage could arise. next stage in process of making assessment was where return in prescribed form had been filed but ITO felt that although information conveyed by return was sufficient for making assessment order, but before that information could be acted upon, assessee should be required to verify same by producing evidence. In such circumstances, he could require assessee to produce evidence in support of his return. Here again assessee was required to produce evidence only in support of statements made by him in prescribed form of return and there was no obligation upon him to convey any other or further information or to produce evidence in support of any other matter which may ultimately be found to be relevant for purposes of making assessment in his case. There could yet be third stage where ITO felt that not only information conveyed in return required verification but also that it was not sufficient for making assessment order. In such case, he was required to specify points and to ask assessee to produce evidence on that point. He could also require assessee to produce some particular evidence having bearing on that point. It is at that stage when assessee was required by ITO to elucidate some particular point that assessee had again been obliged to disclose all primary facts truly and fully in respect of that point. Till this stage was reached, there was no obligation on assessee to disclose or produce evidence in respect of points other than those in respect of which assessee was as provided in prescribed form of return, obliged to furnish full and true information. In our opinion, so long as in assessment proceedings, third stage was not reached, assessee could not be blamed or held liable for not disclosing some information which till then he was not required to furnish in prescribed form but which ultimately was found to be relevant in connection with his assessment. " learned counsel submitted that there was no column in return of income which required any elucidation of entries which appeared in P & L a/c. His contention was that in P & L a/c based on sales of year, commission as stipulated in agreement with English Company was calculated and claimed as deduction. This claim, he submitted, was made because, according to assessee, in three assessment years now under appeal, liability to pay royalty was subsisting liability. He stated that in terms of agreement only English Company could have terminated agreement. In particular he also laid stress on fact that letter of 6th Aug., 1968 from English Company was not addressed to assessee but to New Indo Trading Company. This entity may have been associate of assessee concern but he submitted that entity is not only different from assessee concern and merely because letter was marked for attention of Trilochan Singh, who was director of assessee-company, it did not mean that it was notice of termination of agreement of assessee-company with English Company. It was also submitted that Trilochan Singh, no doubt, had sent letter to English Company dt. 20th Nov., 1968 purporting to confirm that agreement with English Company stood terminated. But he submitted that this action of Trilochan Singh, never found mention in any of meetings of board of directors and, therefore, could not be construed as having received concurrence of board nor could we consider it as binding on assessee- company. It was stated that assessee had obtained legal advice and they were informed that agreement would be subsisting till by efflux of time mentioned in agreement it stood terminated. In this regard he placed reliance on letter dt. 4th Oct., 1975 from firm of solicitors at Bombay Smetham Byrne Lambert & Dubash wherein they had mentioned that agreement continued till 11th Feb., 1971. It was further stated in letter as under : " Clause 8 of agreement gives right to Wood Auto only to terminate agreement by giving three months' notice in writing to company if Wood Auto were not satisfied that product manufactured by company did not have efficiency and standard of those manufactured by Wood Auto themselves and without any notice if for any reason Wood Auto ceases to manufacture product in their ordinary course of business. Under this cl. 8 there is no right to company to terminate agreement. Clause 9 of agreement gives further right to Wood Auto to terminate agreement by three months' notice in writing if company fails to carry out obligations undertaken by company under agreement. On perusal of agreement we do not find any clause which gives right to company to terminate agreement. It appears that during one of visits of Mr. Trilochan Singh to England in July 1968 certain discussions took place between company and representatives of Wood Auto. Wood Auto wrote letter to New Indo Trading Co. confirming that agreement be considered terminated and that it relieved 'you', viz., New Indo Trading Co. of any payment for royalties and they looked forward to receive 'your', i.e., New Indo Trading Company, confirmation that points mentioned in said letter would be adhered to. Mr. Trilochan Singh as director of company in reply by his letter dt. 20th Nov., 1968 confirmed that agreement has been terminated by mutual consent and there is no amount payable by company to Wood Auto for royalties. You had consulted writer some years ago in respect of question of company's liability for payment of royalties under agreement between Wood Auto and company and we had advised you and we confirm that advised given by us to you is as set out in this letter. We advised you that agreement was between Wood Auto and company and that agreement gave Wood Auto only right to terminate agreement under cls. 8 and 9 referred to by us hereinabove. There was no right in company to terminate agreement. letter addressed by Wood Auto to New Indo Trading Co. cannot be valid letter inasmuch as termination notice is not addressed to company. Mr. Trilochan Singh as director of company has addressed letter in reply confirming mutual termination of agreement but letter written by Mr. Trilochan Singh is not under authority of company. It is not open to any one director, more particularly when he is not managing director, to terminate agreement unless it was specifically resolved by company at board meeting. It was open to Wood Auto at later date to contend that their letter terminating agreement was addressed to New Indo Trading Co. which was not party with whom they had entered into agreement and, therefore, agreement was still subsisting and company was liable to pay royalty in terms of agreement. It was also open to Wood Auto to contend that acceptance of termination by mutual agreement by Mr. Trilochan Singh is also not proper and validly accepted. It was also open to company or other directors of company to contend that Mr. Trilochan Singh had no authority to write letter as he did and that said letter written by him was not binding on company. In view of aforesaid, it was decided that company should continue to provide in its books amount of royalties payable by it to Wood Auto under agreement. Accordingly, company made provision in its balance sheet and P & L a/c, and such provision being made was admission of liability on behalf of company and on which if claim was made, company would be liable to pay. company committed breach of agreement as it did not fulfil its obligations under agreement with Wood Auto but failure on part of company to carry out obligations gives right to Wood Auto to enforce provisions of agreement against company. That, however, does not give any right to third parties. It was, therefore, then decided that company should continue to provide for royalty which it may become liable to pay to Wood Auto in event of claim being made and that amount should be written off only after agreement came to end. " learned counsel specifically drew our attention to statement in letter of solicitors that there was consultation with them some years earlier in respect of question of assessee's liability of payment of royalty and that they had advised assessee in similar terms. He, therefore, sought to make point that action of assessee in construing royalty payable from year to year and claiming such amounts as deduction was bona fide and based on competent legal advice. According to learned counsel, where non- statement of any facts was not deliberate and omission was bona fide or accidental, provisions of s. 147(a) would not be attracted. He invited our attention to decision of Kerala High Court in case of M.O. Thomakutty vs. CIT (1963) 47 ITR 872 and in particular certain observations at page 882 and contended that non-furnishing of certain facts where assessee was under bona fide impression that such facts need not be furnished or accidental omission to furnish facts would not bring case within terms of s. 147(a). According to learned counsel, provisions of s. 147(a) would be attracted only where omission or failure on part of assessee to disclose fully and truly all material facts was consequence of deliberate decision to hold back information. learned counsel also relied upon decision of Kerala High Court in case of Sujir Ganesh Nayak & Co. vs. ITO 1976 CTR (Ker) 55 : (1976) 10 4 ITR 524 (Ker) and in particular certain observations at page 539. His submission in brief was that even if what was stated was untrue, it could not be construed as omission or failure to disclose facts. Another decision pressed into service on behalf of assessee was that of Delhi High Court in case of General Mrigendra Shum Sher Jung Bahadur Rana vs. ITO (1980) 17 CTR (Del) 168 : (1980) 123 ITR 329 (Del). It was submitted that escapement of income from assessment either due to particular view of law or facts or mistake on part of ITO would not tantamount to escapement within meaning of s. 147(a). It was always open to ITO to call for additional information and if he failed to do so and accepted contention of assessee, then it was submitted that there was no lapse on part of assessee which would merit invoking action under s. 147(a). Another judicial pronouncement relied on was that in case of Imperial Chemical Industries Ltd. vs. ITO (1978) 111 ITR 614 (Cal) and in particular observations at pages 639 and 640. contention was that it was not duty of assessee to point out each and every inference which ITO was to draw and analogy was put forth with reference to finding of Court in that case that as long as memorandum and articles of association of company were produced, it was not necessary to draw attention of ITO to each and every clause therein. 5 . Adverting to finding of Tribunal for asst. yr. 1972-73, learned counsel stated that findings given therein about applicability of s. 41(1) in relation to asst. yr. 1969-70, viz., remission of liability took place in 1968, itself, was not finding necessary to be given for deciding appeal for asst. yr. 1972-73. He, therefore, stated that such finding of Tribunal was not binding on us and certainly ITO could not take refuge under plea that assessment for asst. yr. 1969-70 was being reopened in pursuance of or to give effect to finding of Tribunal. 6 . Though learned counsel submitted that as far as merits are concerned there was decision of Tribunal for asst. yr. 1972-73, in view of material on record, he stated, it was clear that no remission of liability took place in 1968. For this proposition, he relied on letter dt. 14th April, 1975 written by English Company to ITO wherein company had categorically stated that they were entitled to royalties up to 1968 and they had mentioned that they would be grateful if ITO could assist them to recover same. His contention, therefore, was that no remission took place in 1968 of any liability and company as late as in 1975 considered liability to be outstanding. As long as there was no cessor in 1968, he submitted that ITO for asst. yr. 1969-70 was not justified in making addition for liability remaining unpaid for earlier years of Rs. 1,60,067 by invoking provisions of s. 41(1). Also, he submitted, that since accounting year of assessee for asst. yr. 1969-70 was calendar year, in any view of matter, assessee was bound to pay royalty on sales up to 6th Aug., 1968 and there was no warrant for ITO disallowing Rs. 74,681 in toto. Even taking letter of English Company at face value and construing all points in favour of view taken by Revenue, his submission was that at most only royalty payable from 7th Aug., 1968 to 31st Dec., 1968 could be disallowed. 7. learned Departmental Representative, in reply, took us through provisions of s. 147(a). He stated that word 'omission' as occurring in s. 147(a) was colourless word and which merely refers to not doing of something. For this proposition, reliance was placed on observations of Chagla, CJ., in Pannalal Nandlal Bhandari vs. CIT (1956) 30 ITR 57, 59 (Bom). Therefore, he submitted that where some particular primary fact had not been stated, whether such non-statement was due to accidental omission or even stated, whether such non-statement was due to accidental omission or even due to bona fide view of law taken as long as fact was not stated at time return was filed and prior to completion of original assessment, provisions of s. 147(a) would be attracted. Reliance was also placed on decision of Calcutta High Court in case of ITO vs. Sudhir Kumar Bhose (1972) 84 ITR 60, 65 where Court had stated that it was not material whether non-disclosure was wilful or deliberate to give jurisdiction to ITO under provisions of s. 34 of Indian IT Act, 1922. It was also contended that it was not essential that all enquiries should be finalised before original assessment was completed. Even if there was any suspicion originally and if result on further enquiries revealed that there was non-disclosure of primary facts, provisions of s. 147(a) would be attracted. This, learned Departmental Representative submitted, was ratio which emerged from decision of Supreme Court in CIT vs. T.S. PL. P. Chidambaram Chettiar (1971) 80 ITR 467. According to learned Departmental Representative, relevant decisions on point had all been reviewed and considered by Andhra Pradesh High Court in case of K.C.P. Ltd. vs. ITO (1984) 146 ITR 284 (AP). In particular he stated that Andhra Pradesh High Court in K.C.P. Ltd.'s case (supra) had dissented from decision in Modi Spg. & Wvg. Mills' c s e (supra) which was relied on by learned counsel. learned Departmental Representative stated that as long as ITO has reason to believe that there was omission or failure on part of assessee to disclose fully and truly material facts and that belief was bona fide, then jurisdiction could be validly assumed under s. 147(a). No further fetter could be placed on discretion of ITO. learned Departmental Representative also submitted that letter of Bombay firm of solicitors dt. 4th Oct., 1975 was bereft of any details as to when purported earlier consultation with assessee took place. According to him, therefore, there was no material on record to show that assessee had acted on basis of legal advice in claiming royalty as payable from year to year in spite of agreement with English Company have stood terminated in 1968 and there being no further dues. He also stressed on fact that person who originally signed agreement was Trilochan Singh, director. It was Trilochan Singh again who informed English Company by letter of 20th Nov., 1968 that agreement stood terminated and there were no further dues. Even if letter dt. 6th Aug., 1968 was addressed to New Indo Trading Company, he submitted, it was marked for attention of Trilochan Singh and Trilochan Singh replied on behalf of assessee-company on 20th Nov., 1968 expressly acknowledging receipt of letter dt. 6th Aug., 1968. Therefore, it was clear, learned Departmental Representative stated, that assessee had full knowledge of termination of agreement. He referred to provisions of s. 290 of Companies Act, 1956, and submitted that acts done by person as director would be valid even if it was discovered later that appointment of director was invalid because of any disqualification. Therefore, he emphasised that merely because there has been no formal resolution of board of directors in minutes about termination of agreement, agreement stood validly terminated. He also furnished copy of extracts from minutes of board of directors on dates 7th June, 1962 and 2nd Aug., 1962 to show that board has specifically requested Trilochan Singh to initiate collaboration agreement with English Company and minutes of 17th May, 1963 and 12th Nov., 1963 were referred to show that Bhupinder Singh returned after successful period of training with English Company and on 12th Nov., 1963 Devinder Singh was authorised to make payments to English Company. Bhupinder Singh was managing director of assessee-company and Devinder Singh was director. fact that agreement was not being adhered to, it was stated that it was brought to notice of company and discussed in board meeting on 4th April, 1966. learned Departmental Representative also relied on order sheet entries in connection with asst. yr. 1972-73 wherein assessee was specifically called upon to show that sales had been certified in terms of agreement by order sheet entry dt. 19th Feb., 1975 and assessee was also asked to state whether there was any dispute with regard to payment of royalty till then. assessee had contended that certificate regarding sales had been duly prepared. learned Departmental Representative drew our attention to mention by ITO on 26th March, 1975 that in balance- sheet (apparently referring to that of 1972-73) it was stated by chartered accountant that royalty was shown payable to English Company and in letter of 26th March, 1975 learned Departmental Representative submitted that there was statement by assessee that non-payment of royalty was not due to any dispute regarding quantum of royalty payable to English Company. learned Departmental Representative, therefore, submitted that even when later on specific queries had been asked by ITO assessee did not inform of fact of termination of agreement. learned Departmental Representative also took us through statements recorded from Bhupinder Singh Sahney dt. 20th June, 1975 and 17th Nov., 1975 and also statements of Trilochan Singh in response to summons for hearing on 5th Jan., 1979 (date of statement not recorded). He submitted that there were material contradictions all of which went to show that assessee had withheld information about cancellation of agreement. For all these aforesaid reasons, submission of learned Departmental Representative was that initiation of action under s. 147(a) was perfectly legal. 8. Coming to merits of quantum of royalty disallowed, learned Departmental Representative submitted that Tribunal in its order for asst. yr. 1972-73 had given categorical finding that remission took place in 1968. Therefore, under provisions of s. 41(1) royalty shown as payable for earlier year but not paid, it was submitted, was fully assessable in asst. yr. 1969-70. He stated that all relevant material was considered by earlier Bench, and therefore, such finding should be considered by us as final, especially when assessee had not contested same for asst. yr. 1972-73. Regarding plea of learned counsel that assessee had offered entire amount of royalty payable for assessment in year 1974-75 on ground that remission took place in that year, submission of learned Departmental Representative was that amounts had to be assessed in year in which remission took place and if assessment of amounts under s. 41(1) or disallowances of royalty claimed was upheld in any earlier year, it will be open to assessee to seek for appropriate relief for asst. yr. 1974-75. He stated in particular that there were provisions in Act which authorise grant of relief by waiving of time limit also and such provisions could be resorted to by assessee. For these reasons, he submitted, in quantum also no relief was due for asst. yr. 1969-70. 9. We shall advert later to specific contentions which are applicable only for asst. yrs. 1970-71 and 1971-72 after dealing with points discussed above which are common for each of assessment years now under consideration. which are common for each of assessment years now under consideration. 10 . In order to assume jurisdiction validly to initiate proceedings under s. 147(a) it is settled law that mere vague feeling on part of ITO that there may have been omission or failure on part of assessee to disclose fully and truly all material facts is not sufficient. Authority for this proposition would be decision of Supreme Court in Chhugamal Rajpal vs. S.P. Chaliha (1971) 79 ITR 603. decision of Supreme Court in ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 10 3 ITR 437 (SC) is authority for proposition that there must be reasonable nexus between material and formation of requisite belief. Supreme Court in case of ITO vs. Madnani Engg. Works Ltd. (1979) 12 CTR (SC) 144 : (1979) 118 ITR 1 (SC) observed that mere disclosure of belief without setting out material on basis of which such belief was formed was not sufficient to assume jurisdiction under s. 147(a). After referring to aforesaid judicial pronouncements Andhra Pradesh High Court in case of K.C.P. Ltd. (supra) went on to observe as under : " In this context, we must mention that law with respect to subjective satisfaction is exhaustively stated in celebrated decision of Supreme Court in Barium Chemicals Ltd. vs. Company Law Board (1966) 36 Comp. Cas 639 where it has been held that, while formation of opinion is subjective, existence of facts upon which satisfaction is formed is not subjective and that requisite opinion, satisfaction must be formed on relevant material, and honestly and fairly. So long as that is done, Court cannot interfere with, nor can it go into adequacy of, material. While non-existent fact cannot be made ground for formation of opinion, Court would not at this stage investigate into truth or otherwise of facts, upon which appropriate authority says that it has formed satisfaction. . . ." Before applying aforesaid tests we would set out, in extenso, letter of English Company dt. 6th Aug., 1968 addressed to New Indo Trading Company but specially marked for attention of Trilochan Singh (a director of assessee-company): " In consequence of your visit to our office during July it is confirmed that above mentioned agreement signed on 5th July 1962 between Wood Auto Suppliers (P) Ltd. and Sahney Steel & Press Works Ltd. be considered terminated. This relieves you of any payment for royalties (cl. 2). It also means that under no circumstances are you to use name 'Wood Auto' either in advertisements, copy or on cartons, or in any other way to connect 'Wood Auto' with 'Auto Sahn' products. We look forward to receiving your confirmation that above mentioned points will be adhered to. " We would also set out, in extenso, reply sent by Trilochan Singh as director on behalf of assessee-company dt. 20th Nov., 1968 to English Company : " Dear Sirs, Re. : Collaboration Agreement dt. 5th July, 1962. This has reference to your letter of 6th August, 1968 addressed to our associates. New Indo Trading Company. We confirm that above mentioned agreement between yourselves and ourselves has been terminated by mutual consent and there is no amount payable by us to you for royalties and neither party has any claim against other arising out of or in connection with above mentioned agreement on any score whatsoever. We also confirm that under no circumstances will we use name 'Wood Auto' either in advertisements, copy or on cartons, or in any other way to connect 'Wood Auto' with 'Auto Sahn' products.With kindest regards, Yours faithfully, for Sahney Steel & Press Works (P) Ltd. Sd/- Trilochan Singh Director. " We have referred to facts in course of this order wherein ITO in 1975, when he noticed in connection with later assessment year that royalty had not been paid, had enquired of assessee whether non-payment of royalty was in dispute and reply was that it is not due to any disputes. ITO also noticed aforesaid two letters. At stage of initiation of proceedings under s. 147(a) it is not essential that conclusion which is drawn by ITO that income had escaped assessment consequent to omission or failure on part of assessee fully and truly to disclose all material facts would be final conclusion arrived at on ascertaining entire evidence. What is necessary is only that belief formed should not be mere pretence or make-believe and it should have rational bearing to conclusion formed at that stage that income had escaped assessment. letter of Trilochan Singh dt. 20th Nov., 1968 states unmistakably that agreement stood terminated by mutual consent and further categorically affirmed that there was no amount of royalty payable by assessee to English Company and neither party had any claim against other. date of this letter fell in accounting period relevant to asst. yr. 1969-70 and ITO could certainly have formed belief that since agreement for payment of royalty stood terminated and by mutual consent no royalty was payable, claim for payment of royalty was inadmissible and royalty which stood allowed originally would have to be disallowed. He was entitled to form belief that amount of royalty was allowed originally consequent to omission or failure on part of assessee to fully or truly disclose all material facts. material facts in present case being two letters referred to. adequacy of reasons which led to such belief is not for us to adjudicate upon. 11. learned counsel sought to submit that where omission was not deliberate provisions of s. 147(a) could not be invoked. To support this proposition following observations of Kerala High Court in case of M.O. Thomakutty (supra) was pressed into service : ". . . There is nothing to indicate that at time assessee filed his return his accounts relating to his Cochin business had been completed and that he knew exactly what his income was from that business. In return he had only estimated that income to best of his belief. fact that when only estimated that income to best of his belief. fact that when accounts were finally closed it was seen that income was actually much more, is not sufficient to hold that assessee had not truly and fully disclosed his income unless there is material to show that assessee knew at time he submitted his return that his income was not that which was estimated by him. There is no such material...." aforesaid observations, in our view, only go to show that where assessee was not aware of particular fact, it could not be stated that there was omission on part of assessee to disclose fact. This is because where someone is totally unaware of fact, question of disclosing it does not arise and nobody can be asked to do impossible. In present case fact of existence of two letters was known to assessee-company. letters themselves may not have figured in formal board meeting but reading statements of Bhupinder Singh Sahney, managing director, and Trilochan Singh already adverted to, it is clear that company was aware of contents of letters because persons connected with management including managing director knew exchange of such letters. Bhupinder Singh in his statement dt. 17th Nov., 1975 to question whether company was aware o f letter which Trilochan Singh had written to English Company replied t h t letter was addressed by director Trilochan Singh but it was not discussed in board meeting. He also mentioned in reply to specific question that advice of solicitors was sought after Trilochan Singh had written letter dt. 20th Nov., 1968. It is, therefore, clear that those connected with management of assessee-company including managing director were aware of letter. ratio of decision of Kerala High Court relied upon by learned counsel, therefore, in our view, does not apply in present case. On other hand, Calcutta High Court in case of Sudhir Kumar Bhose (supra) has stated at page 65 that question whether belief was bona fide that such information was not relevant is immaterial inasmuch as non-disclosure need not be wilful or deliberate in order to give jurisdiction to ITO for reopening case under s. 34. learned counsel for assessee had in support of his contention placed considerable reliance on judgment of Allahabad High Court in case of Modi Spg. & Wvg. Mills (supra) as also decision of Kerala High Court in case of Sujir Ganesh Nayak & Co. (supra) first case was pressed into service to highlight proposition that non-disclosure or omission had to be viewed with reference to different stages of assessment proceedings. In other words, at stage of filing return only facts required by return would have to be furnished and at this stage if nothing further was stated, there would be no omission. omission would arise if specific facts are later asked, etc., and information is not given. In latter case observations at page 539 of Sujir Ganesh Nayak & Co.'s case (supra) were relied on to submit that if there was false statement there would be no omission or failure to furnish particulars. observations of Kerala High Court in Sujir Ganesh Nayak & Co.'s case (supra) are as under: " controversy here centres round truth or falsity of certain loans. In other words, facts in dispute here are loans. They are either facts or not facts. If loans are real transactions and so are facts then irrespective of question whether they are primary facts or inferential facts, as they have been mentioned in return, there is no non-disclosure for s. 147(a) to apply. On other hand, if they are bogus and consequently not facts, then also s. 147(a) has no application because mention of them in return is only positive or affirmative statement of false transactions which are not in region of facts and by no stretch of imagination can it be said to be negative act of non- disclosure of facts. In either case s. 147(a) has no application. If ITO has reason to believe that assessee had made in his return incorrect or false statements not amounting to facts he has to look to other provisions in Act for proceeding against assessee and not s. 147(a). Righteous indignation may be felt if assessment was made accepting case of assessee that he had taken loans and subsequently loans are found to be bogus but that is not justification for invoking s. 147(a) unless case falls within it. " Fortunately for us we have observations of Andhra Pradesh High Court which are binding on us in case of K.C.P. Ltd. (supra) which, in our view, provides complete answer to both propositions relied on by learned counsel. These observations are as under : " form which was prescribed for relevant assessment year, undoubtedly, did not contain any column requiring assessee to state whether it had availed of initial depreciation in respect of machinery for which it is claiming normal depreciation in that year. But, we are not prepared to hold that non-disclosure must be confined only to failure to fill up columns contained in form of return prescribed by Rules. We find no reason to give such restricted meaning. Sec. 147 speaks of omission or failure to disclose fully and truly all material facts necessary for assessment for that year. Which fact, or facts, are material for assessment for that year is question of fact to be decided in each case, and it is not possible to lay down any hard and fast rule. Take case of assessee who deliberately makes false statement. Can it be said that making deliberately false statement does not amount to omission or failure to disclose fully and truly all facts material for assessment, merely because that false statement is made in appropriate column of return ... ?" Andhra Pradesh High Court went onto reiterate as under : " As pointed out by us earlier, there is no reason for restricting or curtailing meaning of words 'omission or failure on part of assessee... to disclose fully and truly all material facts necessary for his assessment for that year . . .' in light of proforma of return prescribed by Rules. Doing so would amount to defining material facts as those facts which are required to be stated by return, and none else. This in our opinion, would be unwarranted cutting down of natural and reasonable ambit and field of said words. " In same judgment Andhra Pradesh High Court in deciding whether provisions of s. 147(a) are attracted or not stated as under : "...While it is not necessary for our purpose to hold that assessee is guilty of deliberately false statement in this case, it is sufficient for us to hold that there has been omission or failure, as case may be, on part of assessee to disclose fully and truly all material facts necessary for assessment for that year, inasmuch as it has failed to disclose fact that it had availed of initial depreciation and had thus crossed permissible ceiling, even before said assessment year. This claim for normal depreciation, in circumstances, necessarily implies concealment of material fact, viz., fact of availment of initial depreciation. That fact is material because if that fact were known, assessee would not have been allowed normal depreciation. " Hence, in present case, it is not necessary for us to decide whether assessee had deliberately withheld information or not about existence of two letters or after knowing that royalty was not payable had deliberately not disclosed facts. All that we have to see is that whether there was any omission or failure on part of assessee to disclose fully and truly all material facts necessary for assessment. two letters which we have referred to in background of case are certainly material facts which were not disclosed and, thus, stood omitted to be disclosed. On basis of these two letters ITO could have considered that income assessable in year 1969- 70 and also for subsequent two assessment years had escaped assessment. We may mention that contention was put forth that assessee had secured legal advice and it was on basis of legal advice that assessee had continued to claim royalty payable, that legal advice was that agreement did not stand terminated and would have to spend itself by efflux of time. letter of solicitors relied on was dt. 4th Oct., 1975. letter spoke of assessee having approached them earlier for advice when they gave advice that royalty would continue to be payable. Regarding point of time at which advice was taken, Bhupinder Singh in his statement dt. 17th Nov., 1975 said it was after letter was written by Trilochan Singh on 20th Nov., 1968. No documentary evidence was produced to corroborate actual date when such advice was taken. Trilochan Singh of course stated that they were awaiting reply from English Company to letter dt. 20th Nov., 1968 and, therefore, they were apprehending that claim may be raised before them at any time. To specific question whether any fee was paid to solicitors to obtain opinion, his reply in his statement was that assessee had standing solicitors for whom payments were made in lump sum without itemised details. In view of this categorical statement we, at hearing before Tribunal, required assessee to inform us, if possible with reference to books of account, whether any payments to solicitors in accounting periods 1968-69 and 1970 now under consideration could be shown. In period of about fortnight which was allowed no such details were shown by assessee and learned counsel submitted that in time available on scrutiny that was possible within such time, such payments to solicitors could not be identified. We have, therefore, to hold that as at present assessee has not established that legal advice was taken at point of time anterior to making of claims for deduction of royalty in accounting period referred to. 1 2 . learned Departmental Representative had also relied on judgment of Supreme Court in case of Malegaon Electricity Co. (P) Ltd. vs. CIT (1970) 78 ITR 466 in support of proposition that material considered relevant in deciding whether claim under s. 41(1) or for allowance as deduction of royalty would be relevant to decide whether invoking of provisions of s. 147(a) are in order or not. It is not necessary for us to dwell on this contention any further in light of our findings earlier based on which we have come to conclusion that initiation of action under s. 147(a) was in order for each of assessment years now under consideration since ITO had reason to believe that there was omission or failure on part of assessee to fully and truly disclose all material facts necessary for assessment consequent to which there was escapement of income and adequacy of such reasons is not for us to pronounce upon. 13. Though learned counsel initially had stated that he would not be contesting merits of inclusion, he submitted that since entire gamut of proceedings was relied upon by Revenue and since emphasis was placed on several letters to company, it had come to light that English Company had categorically stated in letter dt. 14th April, 1975 relied on by Department that 'we are entitled to royalties up to 6th Aug., 1968. If you could assist us in this respect we should be obliged'. This statement was in reply to letter of 5th April, 1975 where ITO had pointed out to English Company that careful reading of that letter of 17th April, 1974 showed that liability of assessee to pay royalty no longer exist. According to learned counsel, as long as there was no remission of dues in 1968 under provisions of s. 41(1), amount of Rs. 1,60,067 could not be brought to tax. He stated that findings of Tribunal for asst. yr. 1972-73 that remission took place under s. 41(1) in 1968 was not finding necessary for deciding appeal for that year s. 41(1) in 1968 was not finding necessary for deciding appeal for that year and was not binding on us and in any event since question whether there was cessor arose for consideration this year, it was open to him to urge that cessor did not take place in this year because there was no remission by English Company of dues up to August 1968 even in 1975. He also stressed that assessee on its part had shown cessor of entire liability in asst. yr. 1974-75 and, therefore, there was no question of assessee trying to gain any undue advantage. 1 4 . learned Departmental Representative, on other hand, submitted that all material had been considered by Tribunal in rendering its decision for asst. yr. 1972-73 and it was not open to us to review matter further. 15. We have considered rival submissions. In light of ratio of decision of Bombay High Court in case of H.A. Shah & Co. vs. CIT (1956) 30 ITR 618 though there is no res judicata in income-tax proceedings, successor Tribunal should be slow to depart from finding of earlier Tribunal. It is necessary to consider all facts which are particularly relevant for particular assessment years now under consideration. No doubt as stated by learned counsel English Company had stated in 1975 that they were entitled to royalties up to 6th Aug., 1968, in subsequent letter of 8th Dec., 1978 English Company stated that it was not known how assessee-company continued to claim royalties after cancellation of agreement of 5th July, 1962. However, fact remains that English Company did not at all write to assessee asking for any payment of any earlier dues. They did not also take any legal action for recovery and by letter dt. 20th Nov., 1968 signed by Trilochan Singh as director on behalf of assessee-company it was categorically stated that there was no amount payable by assessee to English Company for royalties and no party had any claim against other. This was only confirmatory letter issued by assessee and English Company did not controvert statement in this letter. In view of categorical stand taken by assessee in letter referred to, we cannot come to finding different from that arrived at by earlier Bench that having regard to correspondence by mutual consent, agreement of 1962 between English Company and assessee was terminated in August 1968, releasing assessee from obligation to pay royalty. On these facts, we are unable to differ from finding of earlier Bench that cessation of liability referred to in s. 41(1) of Rs. 1,60,067 and disallowance of royalty claim of Rs. 74,861 for asst. yr. 1969-70 is in order. 16. As far as asst. yr. 1970-71 is concerned, for similar reasons as set out by us in deciding appeal for 1969-70, disallowance of royalty of Rs. 74,060 is in order. For asst. yr. 1971-72, for same reasons as in earlier years we hold that disallowance of royalty of Rs. 85,288 is in order. 1 7 . For two asst. yrs. 1970-71 and 1971-72, assessee also contests certain disallowances. For asst. yr. 1970-71, disallowance is of Rs. 15,440 which represents purchase price of certain articles said to have been purchased from one Manmohan Dass & Co. and same is contested and for asst. yr. 1971-72, similar disallowance of Rs. 40,430 is contested. As observed by CIT(A), ITO had marshalled all facts. For purposes of present appeals, it is sufficient to state that identity of purported supplier had not been fully established by assessee and in any event, therefore, since payments were not made by crossed cheques, provisions of s. 40A(3) of Act clearly apply and deductions are inadmissible. For purposes of present appeals, it is not necessary for us to elaborate on material discussed in order of assessment and we uphold disallowances of both items in question for respective assessment years. 18. Before parting with these appeals we must state that on date of last hearing request was made by counsel appearing for assessee to grant adjournment so that senior counsel could be engaged. We did not accede to request since case had been fully argued from all angles in detailed manner, with reference to all relevant case law on subject by learned counsel for assessee and learned Departmental Representative. 19. result is, all appeals are dismissed. *** SAHNEY STEELS AND PRESS WORKS LTD. v. INCOME TAX OFFICER
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