George Cheriyan, Accountant Member - (1.) THESE three appeals are preferred by the assessee and they relate to the assessment years 1969-70, 1970-71 and 1971-72. For the sake of convenience, the appeals are considered together and are disposed of by this order since common contentions are involved.
(2.) The assessee is a company. The accounting period is the calendar year preceding the relevant assessment year. In each of the appeals the assessee contests the finding of the Commissioner (Appeals) upholding the validity of proceedings taken under Section 147(a) of the Income-tax Act, 1961 ('the Act'). The assessee entered into an agreement with Wood Auto Suppliers Ltd. of the United Kingdom (English Company) dated 5-7-1962. The English Company were manufacturers of armatures, field coils, etc., which were being sold by them in India under the name of Wood Auto. The assessee had acted as agents of the English Company in the past as seen from the agreement. The assessee sought to have the benefit of technical assistance from the English Company and the English Company agreed that they would not export to India articles referred to therein under the trade name of Wood Auto. 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. There were various other clauses in the agreement. Suffice it to say that commission or royalty was payable at the rate of 3 1/2 per cent of the sale price of the articles mentioned, computed and certified in the manner specified under Clause 2 of the agreement. The agreement in terms of Clause 8 was to remain in force for a period of 7 years from first sale of specified articles. The clause also provided for the agreement being terminated on the happening of certain contingencies. There was also a provision that the agreement could be terminated by giving three months' notice in writing to the assessee, if the English Company was not satisfied with the articles supplied or they did not measure up with the standard. There was also a clause (Clause 14) which stated that the agreement should be construed in all respects in accordance with English law and the parties submitted themselves in terms of this clause to the jurisdiction of the English Courts. On behalf of the English Company the agreement was signed by one Reginald Wood, director and on behalf of the assessee the agreement was signed by Trilochan Singh, director. Purportly in terms of such agreement the assessee had claimed and was also allowed, in the original assessments for the assessment years now under consideration as a deduction, royalty which was claimed as payable. In terms of the agreement the only actual payment of royalty made to the English Company by the assessee was Rs. 10,729 during the period February 1964 to November 1964. According to the assessee, the amounts of royalty payable, which were claimed as deduction in the assessment years commencing from 1965-66 (excluding the solitary amount of actual payment already referred to), were as under : JUDGEMENT_4966_TLIT0_19840.htm Thus, in the assessment years now under appeal, i.e., 1969-70, 1970-71 and 1971-72, in the assessments as originally made amounts of Rs. 74,861, Rs. 74,060 and Rs. 85,288 which stood as debits in the profit and loss account were allowed as deductions. In course of time there was certain correspondence between the ITO on the one hand and the English Company on the other and based on the information contained in the letters of the English Company the ITO considered that the provisions of Section 147(a) were attracted. Accordingly, reasons were recorded before initiating such action and specimen of the reasons recorded which were in similar terms for each of the assessment years has been set out in the common order of the Commissioner (Appeals) and is as under : By virtue of an agreement dated 5-7-1962 entered into by the assessee-com-pany with M/s Wood Auto Suppliers Ltd., England, for purposes of obtaining technical know-how, the assessee has agreed to pay royalty at three and a half per cent of the sales of armatures and field coils. The agreement was operative for 7 years from 12-2-1964 to 12-2-1971. Even though the assessee has been year after year debiting the profit and loss account with the royalty payable to the foreign collaborator, the assessee has not remitted the sums to the non-resident. The opening credit balance in the account of M/s Wood Auto Suppliers Ltd., England, in the previous year relevant to the assessment year 1969-70 is Rs. 1,60,067 and the amount debited to the profit and loss account of the year is Rs. 74,861 towards the said royalty payable. On enquiry with the non-resident company it has been ascertained that the agreement was terminated by issue of a letter dated 6-8-1968 by the non-resident company and that both the parties have agreed to the effect that there would be no claim from either party regarding the payment of royalty. The assessee has not brought to the department's notice about the termination of the agreement or about the cessation of the liability. Therefore, the deduction of the sum of Rs. 74,861 from the income of the year was wrong and the sum of Rs. 1,60,067 was omitted to be included in the total income of the year under Section 41(1). I have reason to believe that, by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the company's assessment for the assessment year 1969-70, income chargeable to tax has escaped assessment for the assessment year 1969-70. I request the sanction of the Commissioner for issue of a notice under Section 148 for the assessment year 1969-70. After obtaining the approval of the Commissioner, notice under Section 147(a) was issued. Such notice for each of the assessment years under appeal was duly served on 20-3-1978. It may be mentioned at this stage that for the assessment year 1972-73, the ITO had disallowed the claim for royalty pertaining to that year and he had also added back by invoking the provisions of Section 41(1) of the Act, an amount of Rs. 3,94,276 representing accumulated royalty for earlier years. These additions were subject of context before the AAC and later before the Tribunal. The Tribunal passed its appellate order for the assessment year 1972-73 in IT Appeal No. 1506 (Hyd.) of 1975-76, dated 31-8-1977. The relevant extract from this appellate order of the Tribunal is as under : The assessee entered into an agreement with M/s Wood Auto Suppliers Ltd. of United Kingdom on 5-7-1962 according to which, the foreign company was to provide the assessee technical information in regard to manufacture of armatures and field coils and to assist it in promotion of sales. 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. In return for the above services, the assessee was to pay the foreign company royalty at three and a half per cent on sales of armatures and field coils manufactured by it, for the purpose of which, the sales should be certified half-yearly on 14th May and 14th November by a firm of chartered accountants. The agreement was to be in force for a period of seven years and it could be terminated by three months' notice given in writing. On the basis of this agreement, the assessee had been claiming some amounts of royalty payable to the foreign company every year by debiting the profit and loss account and the amounts so claimed were allowed in the relevant assessment years, up to 1971-72. For the assessment year 1972-73, the assessee claimed a sum of Rs. 10,313 on similar basis. During the course of the assessment proceedings, the ITO found that the assessee, though debited the royalty payable to the foreign company every year in all the past years, nothing was remitted except for a sum of Rs. 10,729 during the period February 1964 to November 1964 of which tax deduction of Rs. 5,365 was made. On writing to the foreign company the ITO came to know that the agreement for the payment of royalty was terminated as early as 6-8-1968 and this was evidenced by a letter sent by the Company to the New Indo Trading Company in which one of the directors of the assessee-company was interested. This letter read as follows : 'In consequence of your visit to our office during July it is confirmed that the above mentioned agreement signed on 5-7-1962, 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 the name 'Wood Auto' either in advertisements, copy or on cartons, or in any other way to connect 'Wood Auto' with 'Auto Sahn products'. The assessee wrote on 20-11-1968 confirming the termination of the agreement. As a result of the termination the royalty debited to profit and loss account and credited to the foreign company's account in the earlier years was certainly not payable to the said company, but the assessee, instead of writing off the liability in the foreign company's account in the accounting year 1968, wrote it off in 1974 by crediting the profit and loss account. It was contended before the ITO that since the period of agreement was seven years which ended on 15-2-1971 and during which the foreign company could always claim the royalty payable to it, the assessee waited for another three years to cover the period of limitation before writing off the liability in the books. The ITO was not satisfied with the explanation. He held that the agreement ended in the accounting year relevant for this assessment year and since the liability to pay royalty was completely remitted by the foreign company and the liability was allowed as a deduction in the earlier assessments, the entire sum of Rs. 3,94,276 representing accumulated liability for royalties in the earlier years, should be treated as income to the assessee under Section 41(1) of the Act for this assessent. He, accordingly, added back Rs. 3,94,276. In appeal, the Appellate Assistant Commissioner held that since the agreement was terminated as far back as August 1968, the liability ceased in that year itself. If the liability for royalty credited to the foreign company's account was to be added back in the assessment under Section 41 of the Act, it should be done for the assessment year 1969-70 and not for the present assessment year. He has also observed that the ITO has himself reopened the assessment for 1970-71 and added the royalty payable for that year as per the assessee's claim. He; accordingly, deleted the addition in question from the assessment. Before us, the departmental representative has relied on the observations of the ITO while for the assessee, reliance has been placed on the order of the Appellate Assistant Commissioner. In our opinion, the Appellate Assistant Commissioner was correct in the view he has taken. It is clear from the correspondence placed before us to which reference was made by the Appellate Assistant Commissioner, that by mutual consent the agreement of 1962 between the foreign company and the assessee was terminated in August 1968, releasing the assessee-company from the obligation to pay royalty. In fact, except for a sum of Rs. 10,729, the assessee did not pay any royalty to the foreign company on the basis of the agreement in earlier years though a claim was made and allowed as deduction for royalty payable on the basis of the agreement. When once the agreement was terminated in 1968 there was no point in the assessee contending that the agreement was for a period of seven years which ended in 1971 during which the foreign company could always demand the payment. The cessation of liability referred to in Section 41(1) of the Income-tax Act, 1961, took place in 1968 itself. Therefore, the royalty payable for that year and earlier years and claimed as deduction by the assessee could be added back in the assessment in terms of that section. If royalty was claimed and allowed in the subsequent years, i.e., 1969 and 1970, it was an incorrect claim made by the assessee and there may be a case for reopening the assessments relevant for those two years. But, certainly there is no case for adding back the entire liability up to 1971 in the assessment for 1972-73 in terms of Section 41(1) of the Act. We, accordingly, uphold the order of the Appellate Assistant Commissioner in deleting the addition. In appeal before the Commissioner (Appeals), for assessment years now under consideration, the assessee had contested the validity of the initiation of proceedings under Section 147(a). The Commissioner (Appeals) referred to the reasons for reopening as recorded by the ITO to which we have adverted earlier as well as the findings of the Tribunal on arguments in contesting the appeal for the assessment year 1972-73. The Commissioner also adverted to the contention urged on behalf of the assessee before him, viz., that the truth or falsity of a transaction was not a primary fact but only an inferential fact. He has relied in his order on the judicial pronouncements cited in support of this proposition. The substance of the argument before the Commissioner was that there was no non-disclosure of any primary facts by the assessee and, therefore, initiation of proceedings under Section 147(a) was void. The Commissioner did not accept the plea of the assessee and eventually recorded findings in paragraphs 6 and 7 of his order as under : 6. I consider that the appellant suppressed the fact that the obligation to pay royalty ceased on 6-8-1968 when Wood Auto Suppliers Ltd. confirmed that the agreement dated 5-7-1962 should be considered as terminated. It was only when this letter was detected that the ITO discovered the suppression and the consequent escapement of income. Reassessment proceedings are fully justified and are upheld. 7. Sri Ratnakar was fair enough to admit that apart from the validity of the reassessments, there can be no further arguments on merits since the Tribunal's order relating to the assessment year 1972-73 had become final. The amounts brought to reassessment will, therefore, stand confirmed for all the three years in respect of royalties and profit under Section 41(1).
(3.) THE learned counsel for the assessee submitted that the Commissioner was in error in coming to the conclusion that he did. He submitted that whether there was non-disclosure or not of any primary facts had to be considered in the light of the ratio of the judgment of the Allahabad High Court in the case of Modi Spg. & Wvg. Mills v. ITO [1975] 101 ITR 637. In other words, he contended that the degree of information which has to be furnished by an assessee was different at different stages and at a particular stage of assessment proceedings an assessee would be bound only to disclose such facts and furnish such particulars as the Act obliged him to disclose. In particular he referred to observations of their Lordships about the degree of disclosure to be made at different stages which is as under : ... THE scheme underlying these sections seems to indicate that to begin with, at the time of filing of return, an assessee was merely required to furnish the particulars of his income in the prescribed form. In other words, he was to truly and fully supply the information sought for in various columns of the prescribed form of return. If the Income-tax Officer felt that the information conveyed, as per the prescribed form, was correct and was sufficient for making an assessment order, he could proceed to assess the person filing the return on its basis. At that stage no question of the assessee furnishing any information other than that required to be furnished in the prescribed form of return could arise. Accordingly, if the assessee truly and fully disclosed all information required to be supplied in the prescribed form of return, no question of his failure to disclose any other particulars of his income at that stage could arise. THE next stage in the process of making an assessment was where a return in the prescribed form had been filed but the Income-tax Officer felt that although the information conveyed by the return was sufficient for making an assessment order, but before that information could be acted upon, the assessee should be required to verify the same by producing evidence. In such circumstances, he could require the assessee to produce evidence in support of his return. Here again the assessee was required to produce evidence only in support of the statements made by him in the 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 the purposes of making an assessment in his case. THEre could yet be a third stage where the Income-tax Officer felt that not only the information conveyed in the return required verification but also that it was not sufficient for making an assessment order. In such a case, he was required to specify the points and to ask the assessee to produce evidence on that point. He could also require the assessee to produce some particular evidence having a bearing on that point. It is at that stage when the assessee was required by the Income-tax Officer to elucidate some particular point that the 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 the assessee to disclose or produce evidence in respect of the points other than those in respect of which the assessee was as provided in the prescribed form of return, obliged to furnish full and true information. In our opinion, so long as in the assessment proceedings, the third stage was not reached, the assessee could not be blamed or held liable for not disclosing some information which till then he was not required to furnish in the prescribed form but which ultimately was found to be relevant in connection with his assessment. (p. 649) THE learned counsel submitted that there was no column in the return of income which required any elucidation of entries which appeared in the profit and loss account. His contention was that in the profit and loss account based on the sales of the year, commission as stipulated in the agreement with the English Company was calculated and claimed as a deduction. This claim, he submitted, was made because, according to the assessee, in the three assessment years now under appeal, the liability to pay royalty was a subsisting liability. He stated that in terms of the agreement only the English Company could have terminated the agreement. In particular he also laid stress on the fact that the letter of 6-8-1968 from the English Company was not addressed to the assessee but to New Indo Trading Company. This entity may have been an associate of the assessee concern but he submitted that the entity is not only different from the assessee concern and merely because the letter was marked for the attention of Trilochan Singh, who was the director of the assessee-company, it did not mean that it was a notice of termination of the agreement of the assessee-company with the English Company. It was also submitted that Trilochan Singh, no doubt, had sent a letter to the English Company dated 20-11-1968 purporting to confirm that the agreement with the English Company stood terminated. But he submitted that this action of Trilochan Singh, never found mention in any of the meetings of the board of directors and, therefore, could not be construed as having received the concurrence of the board nor could we consider it as binding on the assessee-company. It was stated that the assessee had obtained legal advice and they were informed that the agreement would be subsisting till by efflux of time mentioned in the agreement it stood terminated. In this regard he placed reliance on the letter dated 4-10-1975 from a firm of solicitors at Bombay-Smetham Byrne Lambert & Dubash-wherein they had mentioned that the agreement continued till 11-2-1971. It was further stated in the letter as under : Clause 8 of the agreement gives a right to Wood Auto only to terminate the agreement by giving three months' notice in writing to the company if Wood Auto were not satisfied that the product manufactured by the 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 the product in their ordinary course of business. Under this Clause 8 there is no right to the company to terminate the agreement. Clause 9 of the agreement gives further right to Wood Auto to terminate the agreement by three months' notice in writing if the company fails to carry out the obligations undertaken by the company under the agreement. On the perusal of the agreement we do not find any clause which gives a right to the company to terminate the agreement. It appears that during one of the visits of Mr. Trilochan Singh to England in July 1968 certain discussions took place between the company and the representatives of Wood Auto. Wood Auto wrote a letter to the New Indo Trading Co. confirming that the agreement be considered terminated and that it relieved 'you', viz., the New Indo Trading Co. of any payment for royalties and they looked forward to receive 'your', i.e., the New Indo Trading Company, confirmation that the points mentioned in the said letter would be adhered to. Mr. Trilochan Singh as director of the company in reply by his letter dated 20-11-1968 confirmed that the agreement has been terminated by mutual consent and there is no amount payable by the company to Wood Auto for royalties. You had consulted the writer some years ago in respect of the question of company's liability for payment of royalties under the agreement between Wood Auto and the 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 the agreement was between Wood Auto and the company and that the agreement gave Wood Auto only the right to terminate the agreement under Clauses 8 and 9 referred to by us hereinabove. THEre was no right in the company to terminate the agreement. THE letter addressed by Wood Auto to the New Indo Trading Co. cannot be a valid letter inasmuch as the termination notice is not addressed to the company. Mr. Trilochan Singh as a director of the company has addressed a letter in reply confirming mutual termination of the agreement but the letter written by Mr. Trilochan Singh is not under the authority of the company. It is not open to any one director, more particularly when he is not the managing director, to terminate the agreement unless it was specifically resolved by the company at a board meeting. It was open to Wood Auto at a later date to contend that their letter terminating the agreement was addressed to the New Indo Trading Co. which was not the party-with whom they had entered into the agreement and, therefore, the agreement was still subsisting and the company was liable to pay royalty in terms of the 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 the company or other directors of the company to contend that Mr. Trilochan Singh had no authority to write the letter as he did and that the said letter written by him was not binding on the company. In view of the aforesaid, it was decided that the company should continue to provide in its books the amount of royalties payable by it to Wood Auto under the agreement. Accordingly, the company made provision in its balance sheet and profit and loss account and such provision being made was an admission of liability on behalf of the company and on which if a claim was made, the company would be liable to pay. THE company committed breach of the agreement as it did not fulfil its obligations under the agreement with Wood Auto but the failure on the part of the company to carry out the obligations gives a right to Wood Auto to enforce the provisions of the agreement against the company. That, however, does not give any right to third parties. It was, therefore, then decided that the company should continue to provide for royalty which it may become liable to pay to Wood Auto in the event of a claim being made and that the amount should be written off only after the agreement came to an end. 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. He, therefore, sought to make a point that the action of the assessee in construing the royalty payable from year to year and claiming such amounts as deduction was bonafide and based on competent legal advice. According to the learned counsel, where non-statement of any facts was not deliberate and the omission was bonafide or accidental, the provisions of Section 147(a) would not be attracted. He invited our attention to the decision of the Kerala High Court in the case of M.O. Thomakutty v. CIT [1963] 47 ITR 872 and in particular certain observations at page 882 and contended that non-furnishing of certain facts where an assessee was under the bonafide impression that such facts need not be furnished or an accidental omission to furnish facts would not bring the case within the terms of Section 147(a). According to the learned counsel, the provisions of Section 147(a) would be attracted only where the omission or failure on the part of the assessee to disclose fully and truly all material facts was the consequence of a deliberate decision to hold back information. THE learned counsel also relied upon the decision of the Kerala High Court in the case of Sujir Ganesh Nayak & Co. v. ITO [1976] 104 ITR 524 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 an omission or failure to disclose facts. Another decision pressed into service on behalf of the assessee was that of the Delhi High Court in the case of General Mrigendra Shunt Sher Jung Bahadur Rana v. ITO [1980] 123 ITR 329. It was submitted that escapement of income from assessment either due to a particular view of law or facts or a mistake on the part of the ITO would not tantamount to escapement within the meaning of Section 147(a). It was always open to the ITO to call for additional information and if he failed to do so and accepted the contention of the assessee, then it was submitted that there was no lapse on the part of the assessee which would merit invoking action under Section 147(a). Another judicial pronouncement relied on was that in the case of Imperial Chemical Industries Ltd. v. ITO [1978] 111 ITR 614 (Cal.) and in particular observations at pages 639 and 640. THE contention was that it was not the duty of the assessee to point out each and every inference which the ITO was to draw and the analogy was put forth with reference to a finding of the Court in that case that as long as memorandum and articles of association of a company were produced, it was not necessary to draw the attention of the ITO to each and every clause therein.;