Salil K. Roy Chowdhury, J. - (1.) The short question involved in this appeal is whether the Income-tax Officer had jurisdiction to issue the notice dated the 20th May, 1970, under Section 148 of the Income-tax Act, 1961, for the assessment year 1962-63 and also notices dated 7th July, 1970, under Section 142(1) and Section 143(2) of the said Act to the appellant. The said notices relate to an alleged escapement of income of the appellant (hereinafter also referred to as the "London company") by not disclosing its memorandum and articles of association and the world balance-sheet for the said assessment year. The income alleged to have escaped assessment is the profit alleged to have been earned by financing or money-lending transaction with I.C.I. (India) and repayment of the loan by transfer of shares in the Alkali & Chemical Corporation of India Ltd., Indian Explosives Ltd. and Atic Industries Private Ltd., which are associated companies in India of the London company. It is alleged that the difference between the face value of the said shares and the market value of the date of transfer by the I.C.I. (India) Ltd. to the London company is to the tune of Rs. 14 crores which is alleged to be the profit escaping assessment by alleged omission on the part of the London company to disclose its memorandum, articles and world balance-sheet.
(2.) The present appeal is one of the off-shoots of the various proceedings initiated by the income-tax authorities against the London company and its subsidiary, I.C.I. (India) Ltd. The basic primary facts which are relevant for the purpose of this appeal are either admitted or, in any event, finally concluded by the decisions of the Income-tax Appellate Tribunal and the Supreme Court in a reference matter under Section 52 of the Income-tax Act, 1961 [I.C.I. (India) Private Ltd. v. Commissioner of Income-tax ]. The London company, viz., the appellant, is one of the world's largest chemical manufacturing companies and in India it has promoted the Indian Alkali & Chemical Corporation Ltd. The scheme of investing substantial fund of the London company in India for setting up various manufacturing units of chemical products was conceived after the last world war and finally it decided to finance foreign exchange requirements for the new projects by advancing sterling loans to its hundred per cent. subsidiary, I.C.I. (India) Ltd. For that purpose it appears that prolonged negotiations started between the representatives of the London company and the Government of India and finally a declaration of intention was recorded between the Government of India on the first part, the London company on the second part and subsidiary, I.C.I. (India) Ltd. on the third part. That document seems to be the charter under which the whole scheme of the transactions which has given rise to various proceedings by the income-tax department against the London company and its Indian subsidiary. The declaration has clearly, conclusively and in specific terms set out the intention, machinery and arrangements by which the investment of the London company for purchase of new shares in the three Indian companies which will hereafter be described as A.C.C.I., I.E.L. and Atic have been laid down. It is unnecessary to set out the said declaration of intention dated the 5th of November, 1953, as that has been the subject-matter of the previous Income-tax Act proceeding which ended in the Supreme Court (I. C. I. (India) Private Ltd. v. Commissioner of Income-tax [1972] 83 ITR 710) and also in the present proceeding. The said document is at pages 49-68 of the paper book. Only the portions relevant for the purpose of this appeal are hereunder set out : "I.C.I. refers to the London company and I.C.I. (India) refers to its subsidiary in the document. (b) It has been further agreed that the money required by the new company to finance the creation of the factory and the commencement of manufacture shall at first be raised by Government and I.C.I. taking up one half of the authorised share capital and by the company obtaining a loan or loans to provide the balance required. At some later stage some or all or the remainder of the authorised share capital should be offered to existing shareholders and to the public and the money so raised used (in part) to pay off the loan or loans then outstanding. It is I.C.I.'s present intention to subscribe for so much of this later issue as will ensure that it retains control of the new company. (c) It may be convenient that I.C.I. (India) should for a time hold beneficially the shares which under this agreement are to be allotted to I.C.I. If this is done, I.C.I. (India) will pay the amount due on allotment and subsequent calls with money borrowed from I.C.I. Subsequently, I.C.I. (India) may repay the loan by transfer to I.C.I. of the shares so held. Government have no objection to this course of action. (4) After formation, I.E.L. will issue 20,00,000 shares and allot them as follows: 4,00,000 shares to Government 16,00,000 shares to I.C.I. (or I.C.I. India) Government and I.C.I. (or I.C.I. India) will take up the shares respectively allotted to them. (6) Government agree that if I.C.I. makes a loan to I.C.I. (India) and the latter holds shares in I.E.L. in the circumstances referred to in the recitals hereto that loan may be repaid by a transfer of the shares to I.C.I. at any time and I.C.I. may utilise the money due to it from I.C.I. (India) in the acquisition of such shares. (7) It is recognised by Government and I.C.I. that it might be undesirable to place any shares on the market until I.E.L. has been in production for a minimum of three years and it is the intention of both parties to defer the sale of any shares held by them until that time unless they both agree that any earlier sale is not objectionable. It is agreed that either party desiring to sell any such shares will notify the other before taking any steps to do so. (i) It is agreed that so long as Government and I.C.I. or (I.C.I. India) are the beneficial owners (cither directly or through nominees) of the whole of the issued share capital, directors shall be elected as follows: (a) Five persons nominated by I.C.I. (India) of whom three shall be resident in India and one of whom shall be chairman and other manager of I.E.I.'s factory. (b) One person nominated by Government. (4) In so far as a loan in excess of Rs. 1,00,00,000 is required to carry out the programme contemplated by this declaration, I.C.I. undertakes that it will procure that such a loan is made until the total capital of I.E.L. (whether by share capital or loans),' amounts to Rs. 4,00,00,000. (i) Government agree that in the event that I.C.I. provides capital in excess of 51% of the issued share capital of I.E.L. whether such capital be in the form of share capital or loans, I.C.I. shall be at liberty at any time on the realization or repayment of such capital to remit such excess in sterling to England. 8. Duration of Agreement.--Twenty years or so long as I.C.I. retains a controlling interest in the new company whichever period be the shorter."
(3.) Thereafter, admittedly pursuant to the said scheme of arrangement, the London company made advances to its Indian subsidiary, I.C.I. India Ltd., for acquisition of the shares in the said three companies from time to time between 30th of September, 1954, to 30th of November, 1957. The total amount and the respective dates of advances for the purchase of the shares of the said companies are set out in paragraph 5 of the petition and are at pages 5 and 6 of the paper book. It further appears that in order to avoid double taxation both in India and U.K. and with a view to save tax and get benefits under Section 15C and Section 56A of the Indian Income-tax Act, 1922, it was decided by the London company and its subsidiary in India that the said agreement would be made for purchasing shares in the name of the I.C.I. (India) Ltd. in the said three companies with the foreign exchange advanced by the London company under the said declaration of intention dated the 5th of November, 1953. Thereafter, when the Finance Act, 1959, came into force and withdrew the tax reliefs as dividend, it was decided by the London company to exercise its right to call for the transfer of the shares of the said three companies from the I.C.I. (India) Ltd. and, as a result thereof, on the 16th of February, 1961, the London company exercised its right which was duly approved by the Reserve Bank of India and such transfer was completed in March and April, 1961. The A.C.C.I. shares were transferred by the I.C.I. (India) Ltd. to the London company on the 17th of March, 1961, the I.E.L. shares were transferred on the 25th of March, 1961, and the Atic shares were transferred on the 8th of April, 1961. As it has been stated earlier under the arrangement all these transfers were made at the face value of the shares in the said three companies by the Indian company to the London company. It is also an admitted case that the London company is an assessee under the Income-tax Act and submitted its return for the assessment year 1962-63 on the 28th of July, 1962, disclosing the business income in respect of the year ending 31st of December, 1961 and, inter alia, the income from other sources which included the interests paid by the I.C.I. (India) Ltd. to the London company under the said arrangement for loans advances made for the purchase of the shares in the said three companies. It further appears, as an undisputed and uncontroverted fact, that in the course of the, assessment proceeding for the said assessment year 1962-63 Mr. N.L. Gangadharan, the representative of the appellant, appeared before the then Income-tax Officer, Mr. M. S.M. Maraikayar, and had various discussions with him in the course of the said assessment proceeding. In fact, it also appears that, by a letter dated the 23rd of June, 1965, addressed by the appellant to the said Income-tax Officer, the appellant forwarded at the request of the said Income-tax Officer copies of the correspondence relating to the said loan arrangement between the London company and the I.C.I. (India) in respect of the investment in the shares of A.C.C.I. Ltd. The said letter along with the endorsement of the Income-tax Officer acknowledging the receipt of the said copies of correspondence is annexed to the petition and would appear at page 115 of the paper book and is set out hereunder : JUDGEMENT_614_ITR111_1978Html1.htm;