- (1.) THE petitioner company, admittedly a 100% subsidiary of Oriental Carpet Manufacturers (London) Ltd. impugns the notice dated March 27, 1976 (annexure P-1), purported to have been issued to it under Section 148 of the Income-tax Act, 1961 (for short "the Act" ). It carries on the business of manufacturing and dealing in woollen and worsted fabrics, blankets, shawls, woollen and worsted yarns and carpets in Amritsar District. Its assessment of tax under the Act (section 143 (3)) for the year 1967-68 was finalised by the Income-tax Officer, Amritsar, on October 14, 1968. It concededly was assessed at a lower rate of tax on account of the fact that it was a company in which the public was substantially interested within the meaning of Section 2 (18) of the Act or was a widely held company. Thereafter, the Income-tax Officer served it with a notice dated March 25, 1970, under Section 148 of the Act and it filed its return under protest. During these reassessment proceedings, the Income-tax Officer, vide his order dated March 22, 1971 (annexure P-4), came to the conclusion that the word "public" as occurring in Section 2 (18) of the Act was confined to the Indian public and not to the entire mankind and thus even if it were to be accepted that O. C. M. Ltd. , London, was a widely held company in which the public were substantially interested, that would not entitle the petitioner to be given a special treatment or to be assessed at the reduced rate of tax. This order of the Income-tax Officer was primarily based on another order of assessment pertaining to the petitioner for the assessment year 1966-67. The petitioner successfully impugned these orders of the Income-tax Officer before the Appellate Assistant Commissioner, who, disagreeing with the above-noted reasoning of the Income-tax Officer, cancelled the said assessment orders. Still later, the petitioner was served with the present impugned notice, annexure P-1. It has been issued on the ground that the authorities under the Act have reasons to believe that the income of the petitioner for the assessment year 1967-68 had escaped assessment within the meaning of Section 147 of the Act and it was proposed to reassess the same. The petitioner has been asked to deliver its return in the prescribed form. It has also been mentioned in this notice that the same was being issued by the Income-tax Officer after obtaining the necessary satisfaction of respondent No. 3, i. e. , the Commissioner of Income-tax, Amritsar. The petitioner, through its different communications, annexures P-6, P-7 and P-8, protested to the Income-tax Officer that the impugned notice had been issued without any basis as it had disclosed fully and truly all the material facts in its earlier return and in the absence of disclosure of any reasons or any other information, the respondent-Income-tax Officer could not proceed to reframe assessment against it. In reply to the above-noted communications, though the Income-tax Officer persistently asked the petitioner to disclose the list of the shareholders of its parent company, i. e. , O. C. M. (London) Ltd. , yet, vide letter dated November 13, 1979, respondent No. 2, i. e. , the Inspecting Assistant Commissioner, Amritsar, informed the petitioner as follows: "enclosed please find certain extracts from the correspondence that passed between the auditors (M/s. Ford, Rhodes and Parks, Calcutta) and the management of the parent company, M/s. O. C. M. , London (later known as M/s. Ralli International, London), inasmuch as the fact that it is a widely held company is not established. From the extracts, it will be seen that certain vital information revealing the nature of the shareholdings of the parent company was suppressed before the Income-tax Officer, Mirzapur, who held jurisdiction over the case in the relevant years. On going through the extracts, it is quite clear that the claim of the parent company, being a company in which public are substantially interested as defined under Section 2 (18) of the Income-tax Act, 1961, was false and could not be substantiated. Since the O. C. M. (India) Ltd. was a 100% subsidiary of the London company, as such you have wrongfully enjoyed the benefit of lower rate of taxation applicable to widely held companies. You are, therefore, requested to prove with the help of documentary evidence that the parent company is a company in which the public are substantially interested within the meaning of Section 2 (18) of the Income-tax Act. Your case is fixed for hearing on November 25, 1979. "
(2.) WHILE disputing the fact that the abovesaid correspondence could lead to an adverse inference against the O. C. M. , London, that it was not a widely held company or that the petitioner had suppressed any information revealing the nature of the shareholdings or that the petitioner had wrongly enjoyed any benefit of lower rate of tax, it impugns the notice, annexure P-l, on the following grounds: (i) that the impugned notice has been issued after more than four years from the end of the assessment year 1967-68 ; (ii) that such a notice could be issued only if it fulfilled the precondition that the Income-tax Officer had reason to believe that by reason of omission or failure on the part of the assessee : (a) either to make a return under Section 139 for any assessment year, or (b) to disclose fully and truly all material facts necessary for the assessment, income chargeable to tax has escaped assessment. According to the petitioner, the facts in the instant case do not justify any such "reason to believe" with the Income-tax Officer ; (iii) that in any case, the reasons disclosed to the petitioner for the contemplated action have no relevant bearing or rational connection to the belief the Income-tax Officer is alleged to have formed. In other words, the grounds or the material relied upon in the letter dated November 13, 1979, referred to above do not support or substantiate the allegations contained in the said letter; and (iv) that the Income-tax Officer had failed to obtain the satisfaction of respondent No. 3 as alleged in the impugned notice. According to the petitioner, there was no such material on the basis of which respondent No. 3 could have satisfied himself to come to the conclusion that this was a fit case for the issuance of the impugned notice.
(3.) THE respondent authorities controvert the abovenoted grounds on the plea that the second or the impugned notice dated March 27, 1976, was issued to the petitioner as a result of the facts which came to light after an investigation of the material discovered through search and seizure at the premises of the petitioner at Amritsar and its auditors in Calcutta in February/march, 1973. The correspondence that took place between the petitioner and its aforesaid auditors, M/s. Ford, Rhodes, Parks and Co. , Calcutta, revealed that the petitioner-company had deliberately kept back important information bearing on the matter of their claim that the London company was a widely held company. During the, course of earlier assessment proceedings, the Income-tax Officer had required the petitioner company to let him have the list of the shareholders of the London company along with the relationship of the shareholders in order to establish that it was not being controlled by less than six persons during the relevant assessment year or onwards. This requisition of the Income-tax Officer had a direct bearing on the matter for determination as to whether the parent company of the petitioner was a public company in which the public were substantially interested as defined in Section 2 (18) of the Act. This information was never furnished by the petitioner, rather it was deliberately withheld by it. While dealing with the matter in question, the auditors of the company expressed themselves in the following manner : "but what worries us more is that if the Commissioner of Income-tax persists in his present opinion, higher rates of tax will be levied for all subsequent years also. But the fact that the equity shares in O. C. M. (London) Ltd. are bearer shares poses a great difficulty in regard to evidence which will establish that that company is itself a company in which the public are substantially interested within the meaning of Section 2 (18) of the Income-tax Act. The Income-tax Officer may well call for such evidence and if this evidence cannot be produced, it will make a complete end of your case for taxation at the lower rate of tax applicable to a company in which the public are substantially interested. We are giving this matter our earnest consideration and we shall write to you separately thereon as we do not want to delay our present letter. We note that you have given the Income-tax Officer only an extract of a part of Messrs. Gardiner, Hunter and Co. 's certificate. If you consider any documents, paper or letter to be privileged or confidential as against the Income-tax Officer, we strongly advise you not to give him any extract therefrom because he will then be entitled to call for the entire text and to enforce its production by recourse to Section 131. ";