Indian Oil Corporation Vs. Income Tax
Officer, Central Circle V, Calcutta & Ors  INSC 112 (8 May 1986)
MUKHARJI, SABYASACHI (J) MUKHARJI, SABYASACHI
(J) PATHAK, R.S.
CITATION: 1987 AIR 1897 1986 SCR (2)1107 1986
SCC (3) 409 1986 SCALE (1)1022
Income Tax Act, 1961 - S.147(1)(a) - Income
escaping assessment - Initiation of proceedings for reassessment - Necessary
conditions - What are.
The assessee at the relevant time was a
company incorporated under the laws of the United Kingdom, and had its
principal place of business in India. The assessee was all along assessed under
the Indian Income Tax Act, 1922.
The assessee had claimed deductions every
year of certain expenses amounting to L 1,00,000 or over as administrative
charges incurred by the Burmah Oil Company Limited of London for management and
secretarial work carried on on behalf of the assessee in London. L 1,00,000
represented approximately 40% of the head office expenses of the London Company
which, according to assessee, was a reasonable allocation having regard to the
work done by the London Office on behalf of the assessee. As similar
organisational work was done in London through the London Company, the London
office was managing several companies and debiting prorata to the companies
whose affairs they were managing and thereafter the assessment was completed on
During the assessment for the year 1953-54,
the assessee had furnished in support of its claim for London Management
expenses, certificate from the London Auditors that the sum specified in the
certificate was reasonable having regard to the records and materials produced
before the auditors, which was about 10% of the total administrative expenses
incurred by the Burmah Oil Company Limited, London. The Income-Tax Officer
found that such expenses debited actually in the earlier years were far in
excess of this percentage. The assessee was, therefore, required to furnish a
similar certificate for each of the assessment years 1957-58, 1958-59 and
1959-60. No such certificates were produced by the assessee and by three
notices dated November 25, 1965 under 1108 s.148 of the Income-tax Act 1961,
the Income Tax Officer notified that he had reason to believe that the
assessee's income chargeable to tax for each of the said assessment year had
escaped assessment within the meaning of s. 147(a) and he proposed to reassess
the income for the said years and the assessee was required to furnish the
The assessee challenged the said notices
under Art. 226 of the Constitution on the ground that there was no material to
reopen the assessments. A Single Judge of the High Court quashed the notices
and held that all the facts in possession of the assessee were placed before
the taxing authority prior to making of the assessment; that it was for the
taxing authority either to accept the claim or to reject the claim either
wholly or in part; that after having accepted the claim in spite of
non-production of the relevant auditors' certificate which was asked for at one
stage the revenue could not later turn round and say that the income of the
assessee had escaped assessment or been under-assessed due to the failure of
the assessee to disclose those very auditors' reports and that the under
assessment, if any, was due to the laches of the Revenue and not due to any act
or omission on the part of the assessee.
In the appeal filed by the Revenue, the
Division Bench set aside the decision of the Single Judge, upheld the notices
and held that the assessee had failed to disclose;
(1) the basis of allocation of expenses; (2)
correspondence between the London principal and the assessee company on the
relevant subject; (3) existence of auditors' certificate fixing percentage that
would be reasonable for allocation in respect of the subsidiary companies
including the assessee and, therefore, there were prima facie materials to form
the belief that there was failure and omission in the part of the assessee to
disclose fully and truly all the relevant and material facts which led to the
escapement of income or under assessment of income of the assessee company.
Allowing the appeals of the
appellant-Corporation to this Court, ^
HELD: 1. To confer jurisdiction under clause
(a) of s.147 of the Income Tax Act, 1961 beyond the period of four 1109 years
but within a period of eight years from the end of the relevant year under s.
148 of the assessment year, two conditions were required to be fulfilled: first
is that the Income-tax Officer must have reason to believe that the income profits
or gains chargeable to tax had been underassessed or escaped assessment; the
second was that he must have reason to believe that such escapement or
underassessment was occasioned by reason so far as relevant for the present
purpose to disclose fully and truly all material facts necessary for the
assessment of that year.
Both these conditions are conditions
precedent to be satisfied. [1121 G-H; 1122 A-B]
2. Section 147(a) postulates a duty on every
assessee to disclose fully and truly all material facts necessary for the
assessment. Therefore, the obligation is to disclose facts; secondly those
which are material; thirdly the disclosure must be full and fourthly true.
3. What facts are material and necessary for
assessment will differ from case to case. In every assessment proceedings, for
computing or determining the proper tax due from the assessee, it is necessary
to know all the facts which help the assessing authority in coming to the
correct conclusion. From the primary facts in his possession, whether on
disclosure by the assessee, or discovered by him on the basis of the facts
disclosed, or otherwise, the assessing authority has to draw inferences as to
certain other facts. But once the primary facts are with the taxing authority
it is for him to draw inferences. It is not necessary for the assessee to draw
inferences for him. [1125 D-F] Calcutta Discount Co. Ltd. v. Income-tax
Officer, Companies District I, Calcutta and Another, 41 ITR 191 at 199, S.
Narayanappa and Others v. Commissioner of Income- tax, Bangalore, 63 ITR 219,
Commissioner of Income-tax, West Bengal, and Another v. Hemchandra Kar and
Others, 77 ITR 1, Income-tax Officer, I-Ward, Hundi Circle, Calcutta and Others
v. Madnani Engineering Works Ltd., 118 ITR 1, Ganga Saran & Sons P. Ltd. v.
Income-tax Officer and others, 130 ITR 1 at 13, Income Tax Officer, I Ward,
Distt. VI, Calcutta and others v. Lakhmani Mewal Das, 103 ITR 437 and Sheo Nath
Singh v. Appellate Assistant Commissioner of Income-Tax (Central), Calcutta and
others, 82 ITR 147 at 153, relied upon.
1110 P.R. Mukharjee v. Commissioner of
Income-tax, West Bengal, 30 ITR 535 and Hazi Amir Mohd. Mir Ahmed v.
Commissioner of Income-tax, Amritsar, 110 ITR
4.(i) The learned Trial Judge was right and
the Appellate Court was in error in holding that there were materials from
which it could reasonably be held that the assessee was guilty in not
disclosing the basic facts.[1127 F] 4.(ii) In the instant case, the assessee
had all along disclosed and the Revenue was aware that London management
expenses were incurred on behalf of the assessee by the London Company who were
managing the affairs and doing certain works for the assessee as well as
certain allied companies belonging to Burmah Oil Corporation Group. The
expenses for these allied concerns were on pro-rata basis charged by the London
office and a certain proportion of the expenses were allocated to different
companies and they debited certain portions, i.e.these amounts were realised
from the assessee and allied companies in proportion to which the London
company debited them those charges. This fact was known all along to the
Revenue while making the original assessment for the relevant assessment years.
The audit report of the assessee company was supplied but it is not clear
whether the audit report of the London company was supplied and was asked for.
It is unlikely that when London company was debiting the assessee company and
other companies in the audit report every year, there would be any note that
such debits by which the London company got certain money which were excessive
i.e. the London company realised more than it had actually incurred of the
In any event, however, the amount realised
would be mentioned in the audit report as a basic fact. That has been
disclosed, to the Revenue at the time of the original assessment. The nature
and the quantum of the work done had also been disclosed. Whether it was
excessive or not was an inferential fact. The Income-tax Officer, from time to
time had some doubts as to whether the entirety of the expenses debited were
really incurred for the assessee company by the London company or whether that
was unreasonable or excessive having regard to the magnitude of the work done
by the London company but that would be a matter of opinion and on inference
drawn from the amount of the work in correlation to the amount debited the fact
what was done, what was being claimed by the London 1111 office and the
difficulties in producing the accounts or the opinion of the auditors for which
the Income-tax Officers had called upon the assessee were all known to
Income-tax Officers at the time of making the original assessments. In spite of
the same, the Income-tax Officer chose to assess the assessee in the manner he
did. In the light of the opinion of the Auditors for the assessment year
1963-64 wherein his opinion that ten per cent would be reasonable charge might
be good information for which the assessment of the assessee could be reopened
under clause (b) but on this basis alone it could not be said that the assessee
had failed to disclose fully and truly all basic facts at the time of the
original assessment of the relevant assessment years. There was no evidence or
allegation that such an opinion was there available with the assessee company
the time of the original assessments. Even if such an opinion as opinion
evidence be considered as a basic fact, a question on which no opinion is
required to be expressed, there was no evidence that such opinion was with the
assessee at the time or before the completion of the original assessments for
the relevant assessment years. [1125 F-H; 1126 A-H; 1127 A] 4.(iii) All the
basic facts in this case were disclosed, it was however not disclosed as to
what was the opinion of the Auditor, as to what is reasonable allocation share
of the assessee having regard to the amount of work done on behalf of the
assessee company of the London office expenses. There is no conclusive evidence
that at the relevant time i.e. at the time of filing of the return before the
assessments, such Auditors' opinion about the reasonableness was there.
Secondly, what would be reasonable or not would be an inference of the auditor.
The amount spent, the nature of the work alleged to have been done by London
office on behalf of the assessee and the basis of the allocation had been
explained in reply to the queries made by the Income-tax Officer before the
assessment. The Income- tax Officer had asked at one point of time for the
auditors' opinion. It was stated that such opinion could not be supplied. In
spite of the same, the Income-tax Officer did not choose to make a best
judgment assessment and did not draw any adverse inference against the
assessee. It cannot, therefore, be held that there was failure to disclose
fully and truly all basic facts. [1127 A-E]
CIVIL APPELLATE JURISDICTION : CIVIL APPEAL
NOS. 1189- 1190 OF 1974 1112 From the Judgment and Order dated 7.12.1973 of the
Calcutta High Court in Appln. No. 189 and 196 of 1971.
Dr. Devi Pal, Ms. M. Seal, D.N. Gupta, H.K.
Datt and Miss Mridul Ray for the Appellant.
C.M. Lodha, Dr. V. Gaurishankar, Miss A.
Subhashini and C.V. Subba Rao for the Respondents.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. Whether the reopening of the assessments of the
assessee under section 147(a) of the Indian Income Tax Act, 1961 (hereinafter
referred to as the 'Act') was valid, is the question involved in these appeals
by special leave from the Bench decision of Calcutta High Court dated 7th December,
1973. The assessment years involved are 1957-58, 1958-59 and 1959-60.
It may be mentioned that on notices being
issued for reopening of the assessments under section 148 of the Act under
condition 147(a) of the said Act, the assessee challenged the said notices on
the ground that there were no materials to initiate such reopening. Such
challenge was upheld by the learned single judge of the High Court and the
notices in question were quashed.
The revenue being aggrieved preferred appeals
before the division bench of the High Court. The division bench of the High
Court reversed the findings of the learned trial judge and the notices were
upheld. Hence these appeals.
The assets and liabilities of erstwhile the
Assam Oil Company have since then vested in the Indian Oil Corporation and on
an oral application having been made on behalf of the assessee, we have
directed that the name of the Indian Oil Corporation be substituted.
The assessee at the relevant time was a
company incorporated under the appropriate laws of the United Kingdom, and had
its principal place of business at the relevant time in India at Digboi in the
State of Assam. It carried on business, inter alia, in oils and lubricants. As
the years involved were 1113 prior to the introduction of the Act in question,
the assessee was all along assessed under the provisions of the Indian
Income-Tax Act, 1922 (hereinafter called the '1922 Act'). In its assessment
under the 1922 Act, the assessee had claimed deductions every year of certain
expenses amounting to # 1,00,000 or over as administrative charges incurred by
the Burmah Oil Company Limited of London for management and secretarial work
carried on on behalf of the assessee in London. For the assessment year
1951-52, it might be mentioned, the Income-tax Officer wrote a letter to the
assessee asking for certain informations and one of the informations asked for
was regarding London charges. The assessee was asked to furnish a schedule in
respect of the London charges and also to let the Income-tax Officer know
whether any reserve had been debited to this account of London charges. The
letter was dated 19th December, 1952.
The assessee by its letter replied to that
query where it informed the Income-tax Officer that as advised in connection with
the 1950-51 assessment, London charges being about # 1,00,000 represented
approximately 40% of the head office expenses of the London Company being the
charges made by the Burmah Oil Company for management and secretarial work
carried out on behalf of the assessee company in London covering Stores
Purchasing, Accounting, Staff, Geological and other Departments. The assessee
further informed the taxing authorities that it had been advised by its London
office that the amount represented a reasonable allocation having regard to the
work done by the London office on behalf of the assessee. As the point in
question in these appeals is whether there was failure or omission on the part
of the assessee it is necessary to refer in detail to the correspondence. For
the assessment year 1951-52 in response to the enquiries the assessee made it
clear that the London charges represented the charges made by the Burmah Oil
Company which managed the assessee company along with other companies in
respect of the management work and secretarial work carried out in London
covering the various items indicated before. In other words as similar
organisational work were done in London through the London company, the London
office was managing several companies and debiting pro-rata to the companies
whose affairs they were managing.
The assessment was completed thereafter
apparently on the said basis.