Ganga Saran and Sons Pvt. Ltd.
Calcutta Vs. Income Tax Officer & Ors [1981] INSC 101 (23 April 1981)
BHAGWATI, P.N.
BHAGWATI, P.N.
VENKATARAMIAH, E.S. (J)
CITATION: 1981 AIR 1363 1981 SCR (3) 564 1981
SCC (3) 143 1981 SCALE (1)883
CITATOR INFO :
R 1987 SC1897 (31)
ACT:
Income Tax Act 1961, S. 147-Income
Tax-Escaped assessment-Duty of assessee to disclose fully and truly all
material facts necessary for his assessment for that year- Meaning of.
Director in sole charge of management of
business of assessee-Paid remuneration for services-Utilisation of the
remuneration by director-Assessee whether under obligation to disclose to the
Income Tax Officer in the course of its assessment.
HEADNOTE:
The assessee was incorporated as a Private
Limited Company in March, 1947 with G as its Managing Director and it took over
the business of the trading company carried on by 'D' in Delhi. D was the
brother-in-law of G and was placed in charge of the management of the business
of the Delhi Branch of the assessee and he was paid a salary of Rs. 1000 per
month, commission at the rate of 1 per cent on the sales of the Delhi Branch
and bonus equivalent to three months salary.
The assessments of the assessee for the years
1949-50 to 1959-60 were finalised on the basis of the decisions of the
Income-Tax Tribunal and the amounts paid to the Managing Director and the other
Directors including D by way of salary, commission and bonus were allowed in
full as permissible deductions and so was the interest paid on the credit balances
in their respective accounts.
On the 28th March, 1968, the Income Tax
Officer issued a notice under Section 148 of the Income Tax Act, 1961 seeking
to reopen the assessment of the assessee for the assessment year 1959-60 on the
ground that the income of the assessee had escaped assessment at the time of
the original assessment. The Income Tax Officer, however, did not state the
reasons which had led to the belief that the income of the assessee had escaped
assessment by reason of omission or failure to disclose material facts nor did
he give any reasons though requested by the assessee.
The assessee's writ petition challenging the
validity of the notice was allowed by a Single Judge and the notice issued by
the Income Tax Officer was quashed. It was held that there was no omission or
failure on the part of the 565 assessee to disclose material facts relating to
his assessment and that there was no reason to believe that any part of the
income of the assessee had escaped assessment at the time of the original
assessment by reason of wrong allowance of the remuneration paid to D as a
permissible deduction.
The Division Bench allowed the appeal,
holding that the Income Tax Officer had reason to believe that the remuneration
paid to D had been wrongly allowed as a permissible deduction by reason of
omission or failure on the part of the assessee to disclose the material facts
and the notice issued by the Income Tax Officer was justified.
Allowing the appeal to this Court,
HELD: 1. (i) neither of the two conditions
necessary for attracting the applicability of Section 147(a), was satisfied.
The notice issued by the Income Tax Officer is therefore without jurisdiction.
[574 G] (ii) It is not possible to sustain the conclusion that the assessee
omitted or failed to disclose fully and truly any material facts relating to
his assessment.
[574 F]
2. (i) Before the Income Tax Officer can
assume jurisdiction to issue notice under Section 147(a), two distinct
conditions must be satisfied. First, he must have reason to believe that the
income of the assessee has escaped assessment and secondly, he must have reason
to believe that such escapement is by reason of the omission or failure on the
part of the assessee to disclose fully and truly all material facts necessary
for his assessment. If either of these conditions is not fulfilled, the notice
issued by the Income Tax Officer would be without jurisdiction. [571 F] (ii)
The important words under Section 147(a) are "has reason to believe"
and these words are stronger than the words "is satisfied.". The
belief entertained by the Income Tax Officer must not be arbitrary or
irrational. It must be reasonable or in other words it must be based on reasons
which are relevant and material. The Court, cannot investigate into the
adequacy or sufficiency of the reasons which have weighed with the Income Tax
Officer, in coming to the belief, but the Court can examine whether the reasons
are relevant and have a bearing on the matters in regard to which he is
required to entertain the belief before he can issue notice under Section
147(a). If there is no rational and intelligible nexus between the reasons and
the belief, so that, on such reasons, no one properly instructed on facts and
law could reasonably entertain the belief, the conclusion would be inescapable
that the Income Tax Officer could not have reason to believe that any part of
the income of the assessee had escaped assessment and such escapement was by
reason of the omission or failure on the part of the assessee to disclose fully
and truly all material facts and the notice issued by him would be liable to be
struck down as invalid. [571 G-572 C]
3. Even a close relative who is in management
and charge of a business on a full time basis is entitled to be paid remuneration
and, in fact, it would be wholly unreasonable to expect him to work free of
charge. [573 C] 566 In the instant case D was the brother-in-law of G the
Managing Director of the assessee but this circumstance cannot lead to an
inference that the payment of remuneration to D who was solely managing and
looking after the business of the Delhi Bench of the assessee was sham and
bogus. There is nothing unusual in D giving a loan to his brother-in-law, the
Managing Director or making gifts to the son, wife and daughter-in-law of the
Managing Director who were his close relatives. Any inference that the payment
of remuneration to D was sham and bogus cannot be drawn merely from the manner
in which he expended the amount of remuneration received by him, particularly
when the persons to whom he gave a loan and made gifts were his close
relatives.
[573 E-574 B]
4. The statements of account of D with the
assessee for the relevant accounting year as also the previous years were with
the Income Tax Officer at the time of the original assessment and these
statements of account clearly showed that out of the amount of remuneration
credited to his account, he had made gifts to the sons of G on 31st July, 1957
and given a loan to G on the 25th August, 1958 and the Income Tax Officer was
fully aware that G was the Managing Director of the assessee. The assessee
could not therefore be said to be under an obligation to disclose to the Income
Tax Officer in the course of its assessment as to how the director who was in
sole charge of the management of the business of the assessee, and who was
being paid remuneration for the services rendered by him to the assessee, had
utilised the amount of remuneration received by him. [574 C-F]
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
1146 of 1973.
From the judgment and order dated the 1st,
June 1972 of the Calcutta High Court in Appeal No. 150 of 1971 arising out of
Matter No. 262 of 1968.
Debi Pal, A.K. Verma and K.J. John for the
Appellant.
V.S. Desai, Champat Rai and Miss A. Subhashini
for the Respondents.
The Judgment of the Court was delivered by
BHAGWATI, J. This appeal by certificate is directed against an order passed by
a Division Bench of the High Court of Calcutta allowing an appeal against a
decision of a Single Judge which quashed and set aside a notice dated 28th
March 1968 issued by the Income Tax Officer under section 148 of the Indian
Income Tax Act, 1961 seeking to reopen the assessment of the assessee for the
assessment year 1959-60.
The facts giving rise to the appeal are a
little important and they may be briefly stated as follows.
567 Prior to March 1947, one Deo Datt Sharma
carried on business in Delhi in the name of Sharma Trading Company. The
business was quite a prosperous one and the record shows that Deo Datt Sharma
was making an average profit of about Rs. 36,000 per year. In March 1947, the
assessee was incorporated as a private limited company with Ganga Saran Sharma
as its managing director and it took over the business of Sharma Trading
Company as a going concern in consideration of allotment of 1703 shares in the
share capital of the assessee to Deo Datt Shrama. The share capital of the
assessee consisted of 8500 shares out of which 1703 shares were allotted to Deo
Datt Sharma, 5 shares were held by Ganga Saran Sharma and 3500 shares, by a
company called Narendra Trading Company controlled by Ganga Saran Sharma and
his wife. It may be pointed out at this stage that Deo Datt Sharma was the
brother-in-law of Ganga Saran Sharma. When business of Deo Datt Sharma was
taken over by the assessee, Deo Datt Sharma was appointed Director of the
assessee along with two other persons. Deo Datt Sharma was placed in charge of
management of the business of Delhi Branch of the assessee and he was paid a
salary of Rs. 1000 per month, commission at the rate of 1 per cent on the sales
of the Delhi Branch and bonus equivalent to three months' salary. Ganga Saran
Sharma and the other two directors were also paid salary, commission and bonus
but it is not necessary to set out the quantum of the emoluments paid to them,
because in this appeal we are concerned only with the emoluments paid to Deo
Datt Sharma and not with the emoluments paid to other directors.
The Income Tax Officer while assessing the
assessee to tax for the assessment year 1949-50 disallowed the claim of the
assessee for deduction in respect of payments made to the managing director and
other directors on account of commission and bonus. On appeal by the assessee
the Appellate Assistant Commissioner disagreed with the view taken by the
Income Tax Officer and allowed the entire amount paid to the managing director
and other directors by way of commission and bonus. So far as Deo Datt Sharma
is concerned, the Appellate Assistant Commissioner observed that having regard
to the fact that this very business was carried on by Deo Datt Sharma prior to
its taking over by the assessee and it was a prosperous business earning on an
average about Rs. 36,000 per year and after taking over of the business by the
assessee, Deo Datt Sharma continued to be in sole management of the 568
business of the Delhi Branch, the aggregate amount paid to him could not at all
be regarded as excessive and was allowable as a permissible deduction. Thus the
entire amount paid by the assessee to the managing director and other directors
was allowed by the Appellate Assistant Commissioner as a deduction in computing
the taxable income of the assessee. The assessee had thereafter no difficulty
in claiming deduction of the amount paid to the managing director and other
directors on account of salary, commission and bonus, but again in the
assessment year 1956- 57, the Income Tax Officer disallowed a substantial
portion of the remuneration paid to the managing director and the assessment
made by the Income Tax Officer was confirmed in appeal by the Appellate
Assistant Commissioner and in further appeal by the Income Tax Tribunal. This
led to the making of a reference and the High Court answered the question
referred to it in favour of the assessee and held that the disallowance of a
portion of the remuneration paid to the managing director was not justified.
While making the assessment for the assessment year 1957-58, the Income Tax
Officer once again disallowed a part of the remuneration paid to the managing
director as also the amounts of interest paid to the directors on the balances
lying to the credit of their respective accounts with the assessee on account
of undrawn remuneration. The Appellate Assistant Commissioner in appeal held
that the interest paid to the directors on the balances lying to the credit of
their respective accounts was an allowable expenditure but he sustained the
disallowance of a portion of the remuneration paid to the managing director.
The assessee thereupon preferred a further appeal to the Tribunal and after
considering all the facts and circumstances of the case, the Tribunal came to
the conclusion that the remuneration paid to the managing director as also to
the other directors was not at all excessive and no portion of it could
justifiably be disallowed. The result was that not only was the remuneration
paid to the managing director and the other directors allowed in full as a
permissible deduction but also the amount of interest paid on the credit
balances in their respective accounts was allowed to be deducted as a
permissible expenditure. Obviously, and this could not be disputed on behalf of
the Revenue, the accounts of the managing director and other directors
including Deo Datt Sharma showing the amount of remuneration credited and the
withdrawals debited in each year were produced before the Income Tax Officer
and he was aware that only a very small amount was withdrawn by Deo Datt Sharma
out of the remuneration credited in his account. The 569 record also shows that
on a query made by the Income Tax Officer the assessee furnished inter alia the
assessment file number of Deo Datt Sharma who was being assessed in Delhi. The
assessment for the assessment year 1958-59 also followed the same course upto
the stage of appeal before the Income Tax Tribunal and ultimately the amount of
interest paid to the directors on the credit balances in their respective
accounts was allowed as a permissible deduction to the assessee. The assessment
of the assessee for the subsequent year 1959-60 was thereafter completed on the
basis of the decision of the Income Tax Tribunal for the two earlier assessment
years and the amounts paid to the managing director and other directors
including Deo Datt Sharma by way of salary, commission and bonus were allowed
in full as permissible deductions and so was the interest paid on the credit
balances in their respective accounts.
On 28th March, 1968 the Income Tax Officer
issued a notice under section 148 of the Income Tax Act, 1961 seeking to reopen
the assessment of the assessee for the assessment year 1959-60 on the ground
that the income of the assessee had escaped assessment at the time of the
original assessment. Since a period of four years had already elapsed from the
close of the assessment year 1959-60 and no notice could be issued under
section 147 (b), it was obvious that the notice issued by the Income Tax
Officer was based on section 147 (a), and it could be justified only if it
could be shown that the Income Tax Officer had reason to believe that, by
reason of omission or failure on the part of assessee to disclose any material
facts, the income of the assessee had escaped assessment. The Income Tax
Officer however did not indicate in the notice as to what were the reasons
which had led him to believe that the income of the assessee had escaped
assessment by reason of omission or failure to disclose material facts nor did
he give any reasons though requested by the assessee to do so. The assessee
thereupon preferred a writ petition in the High Court of Calcutta challenging
the validity of the notice on the ground that there was no omission or failure
on the part of the assessee to disclose any material facts at the time of the
original assessment and that in any event, there was no reason to believe that
any part of the income of the assessee had escaped assessment by reason of such
omission or failure. The writ petition was admitted and rule was issued by a
single Judge of the Calcutta High Court. The Income Tax Officer, possibly on
service of the rule, addressed a letter dated 19th June 1968 to the assessee
stating that 570 the notice was issued by him because he had reason to believe
that the payment of remuneration to Deo Datt Sharma was bogus and false. The
Income Tax Officer also stated in the affidavit filed by him in reply to the
writ petition that after the assessment of the assessee was completed for the
assessment years upto 1963-64, the Income Tax Officer came to learn that Deo
Datt Sharma was the brother-in-law of Ganga Saran Sharma, managing director and
that Deo Datt Sharma had disposed of the income received by him by way of
remuneration from the assessee, in the following manner:
1. On 31st July 1957 he made a gift to Shri
Narendra Sharma son of Shri Ganga Saran Sharma, Managing Director of the
Company. Rs. 12,550.00
2. On 25th August 1958 he made a loan to
Ganga Saran Sharma. Rs. 2,25,000.00 --------------- Total 2,37,550.00
--------------- and thereafter, out of the amount lying to his credit in the
account with the assessee, he had made the following gifts:
On 5th December 1960 gift to Brahma Devi wife
of Ganga Saran Sharma Rs.1,01,101.00 On 21st December 1960 gift to Indu Sharma
daughter-in-law of Ganga Saran Sharma Rs. 15,101.00 On 26th December 1961 gift
to Hemlata Sharma daughter-in-law of Ganga Saran Sharma. Rs. 50,101.00 The
Income Tax Officer stated that out of the total amount of remuneration of Rs.
3,51,000 received by Deo Datt Sharma during the period upto 31st March 1962, he
had paid tax in the sum of about Rs. 65,000/- and spent a total sum of Rs. 2,37,550
on account of gifts and loan as aforesaid and the withdrawals made by him for
his own purposes thus did not amount to more than Rs. 4000 per year. These
facts, according to the Income Tax Officer, showed 571 that the remuneration
paid to Deo Datt Sharma was not genuine and was sham and bogus and the amount
of such remuneration alleged to have been paid to Deo Datt Sharma was wrongly
allowed as a permissible deduction and hence the assessment of the assessee was
liable to be reopened by issue of a notice under section 147 (a).
The learned single Judge of the Calcutta High
Court who heard the writ petition took the view that there was no omission or
failure on the part of the assessee to disclose any material facts relating to
his assessment and that in any event, there was no reason to believe that any
part of the income of the assessee had escaped assessment at the time of the
original assessment by reason of wrong allowance of the remuneration paid to
Deo Datt Sharma as a permissible deduction. The writ petition was accordingly
allowed by him and the notice issued by the Income Tax officer was quashed and
set aside. The Income Tax Officer thereupon preferred an appeal before a
Division Bench of the Calcutta High Court and the learned Judges constituting
the Division Bench allowed the appeal, holding that the Income Tax Officer had
reason to believe that the amount of remuneration paid to Deo Datt Sharma had
been wrongly allowed as a permissible deduction by reason of omission or
failure on the part of the assessee to disclose the material facts set out
above and the notice issued by the Income Tax Officer was justified. The
assessee thereupon preferred the present appeal in this Court after obtaining a
certificate of fitness from the High Court of Calcutta.
It is well settled as a result of several
decisions of this Court that two distinct conditions must be satisfied before
the Income Tax Officer can assume jurisdiction to issue notice under section
147 (a). First, he must have reason to believe that the income of the assessee
has escaped assessment and secondly, he must have reason to believe that such
escapement is by reason of the omission or failure on the part of the assessee
to disclose fully and truly all material facts necessary for his assessment. If
either of these conditions is not fulfilled, the notice issued by the Income
Tax Officer would be without jurisdiction. The important words under section
147 (a) are "has reason to believe" and these words are stronger than
the words "is satisfied". The belief entertained by the Income Tax
Officer must not be arbitrary or irrational. It must be reasonable or in other
words it must be based on reasons which are relevant and material. The Court,
of course, cannot investigate into the adequacy or sufficiency of the reasons
which 572 have weighed with the Income Tax Officer in coming to the belief, but
the Court can certainly examine whether the reasons are relevant and have a
bearing on the matters in regard to which he is required to entertain the
belief before he can issue notice under section 147 (a). It there is no
rational and intelligible nexus between the reasons and the belief, so that, on
such reasons, no one properly instructed on facts and law could reasonably
entertain the belief, the conclusion would be inescapable that the Income Tax
Officer could not have reason to believe that any part of the income of the
assessee had escaped assessment and such escapement was by reason of the
omission or failure on the part of the assessee to disclose fully and truly all
material facts and the notice issued by him would be liable to he struck down
as invalid.
Now here on the facts as admitted or found it
is clear that Deo Datt Sharma was carrying on the same business prior to the
incorporation of the assessee as a private limited company and this business
was yielding him an average profit of about Rs. 36000 per year. When the
assessee, on incorporation, took over the business as a going concern from Deo
Datt Sharma it appointed Deo Datt Sharma as a director and placed him in sole
charge of the management of the Delhi Branch of the business. In fact, it could
not be disputed on behalf of the Revenue that Deo Datt Sharma was looking after
the business of the Delhi Branch of the assessee in the same manner in which he
was doing when he was sole proprietor of the business and for this work done by
him, Deo Datt Sharma was paid salary at the rate of Rs. 1000 per month,
commission at the rate of one per cent on the sales of the Delhi Branch and
bonus equivalent of three months' salary. The amount of remuneration paid to
Deo Datt Sharma was thus not without consideration; in fact, it was paid for
valuable services rendered by Deo Datt Sharma in solely managing the business of
the Delhi Branch of the assessee. Now once it is conceded that Deo Datt Sharma
was in sole charge and management of the business of the Delhi Branch of the
assessee and was rendering full time service to the assessee in that capacity,
it is difficult to see how anyone could reasonably come to the belief that the
payment of remuneration made to him was sham and bogus. Surely, the Income Tax
officer could not expect Deo Datt Sharma to devote his full time and energy to
the business of the Delhi Branch of the assessee without any remuneration
whatsoever.
The actual remuneration paid to Deo Datt
Sharma was in fact found to be genuine and reasonable by the Appellate
Assistant Commissioner 573 while disposing of the appeal of the assessee for
the assessment year 1949-50 as also by the Income Tax Tribunal while disposing
of the appeal for the assessment year 1957-
58. It is true that Deo Datt Sharma was the
brother-in-law of Ganga Saran Sharma, the managing director of the assessee,
but this circumstance cannot by any stretch of imagination lead to an inference
that the payment of remuneration to Deo Datt Sharma who was solely managing and
looking after the business of the Delhi Branch of the assessee was sham and
bogus. Even a close relative who is in management and charge of a business on a
full time basis is entitled to be paid remuneration and, in fact, it would be
wholly unreasonable to expect him to work free of charge.
The Revenue, however, relied strongly on the
fact that out of the total amount of remuneration of Rs. 3,51,000 received by
Deo Datt Sharma and credited to his account with the assessee, he had not
withdrawn more than Rs. 4,000 per year for himself and an aggregate sum of Rs.
2,37,550 was expended by him in giving a loan to Ganga Saran Sharma and making
gifts to the son, wife and daughters-in-law of Ganga Saran Sharma on diverse
dates between 31st July, 1957 and 26th December 1961. We fail to see how this
fact can lend itself to the inference that the payment of remuneration to Deo
Datt Sharma was bogus and not genuine. It is an admitted fact that Deo Datt
Sharma was the brother-in-law of Ganga Saran Sharma and there is nothing
unusual in Deo Datt Sharma giving a loan to Ganga Saran Sharma or making gift
to the son, wife and daughters-in-law of Ganga Saran Sharma who were his close
relatives. It is indeed difficult to appreciate how any inference can
reasonably be drawn that the payment of remuneration to Deo Datt Sharma was
sham and bogus merely from the manner in which he expended the amount of
remuneration received by him, particularly when the persons to whom he gave a
loan and made gifts were his close relatives. It is possible that Deo Datt
Sharma had other financial resources apart from the remuneration derived by him
from the assessee and he therefore decided to give a loan and make gifts to his
close relatives out of the remuneration received by him for valuable services
rendered to the assessee. In fact, if he had no other financial resources, it
is extremely difficult-one might say, almost impossible-to believe that he
worked for the assessee and managed and looked after the business of the Delhi
Branch on a full time basis without any remuneration or in any event on a 574
paltry remuneration of Rs. 4,000 per year when the managing director and other
directors who were working like him were getting much more from the assessee
and as the proprietor of the business prior to its taking over by the assessee,
he was earning an average profit of about Rs. 36,000/- per year. We are clearly
of the view that on these facts the Income Tax Officer could have no reason to
believe that the payment of remuneration to Deo Datt Sharma was sham and bogus
and that the amount of remuneration paid to him was wrongly allowed as a
permissible deduction.
We may point out that, in fact, the statement
of account of Deo Datt Sharma with the assessee for the relevant accounting
year as also the previous years were with the Income Tax Officer at the time of
the original assessment and these statements of account clearly showed that out
of the amount of remuneration credited to his account, he had made a gift of
Rs. 12,550 to the son of Ganga Saran Sharma on 31st July 1957 and given a loan
of Rs. 2,25,000 to Ganga Saran Sharma on 25th August, 1958 and the Income Tax Officer
was fully aware that Ganga Saran Sharma was the managing director of the
assessee. It is possible and we may assume it in favour of the Revenue, that
the subsequent gifts made by Deo Datt Sharma to the wife and daughters-in-law
of Ganga Saran Sharma were not disclosed to the Income Tax Officer at the time
of the original assessment, but these gifts being subsequent to the relevant
accounting year, the assessee was not bound to disclose the same to the Income
Tax Officer. Moreover, it is difficult to appreciate how the assessee could be
said to be under an obligation to disclose to the Income Tax Officer in the
course of its assessment as to how a director who was in sole charge of the
management of the business of the assessee and who was being paid remuneration
for the services rendered by him to assessee, had utilised the amount of
remuneration received by him. We do not think it possible to sustain the
conclusion that the assessee omitted or failed to disclose fully and truly any
material facts relating to his assessment.
We must in the circumstances hold that
neither of the two conditions necessary for attracting the applicability of
section 147(a) was satisfied in the present case and the notice issued by the
Income Tax Officer must be held to be without jurisdiction.
We accordingly allow the appeal, set aside
the judgment of the Division Bench and restore that of the learned single Judge
quashing 575 and setting aside the notice dated 28th March 1968 issued by the
Income Tax Officer against the assessee. The Revenue will pay the costs of the
assessee throughout.
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