1981 (4) TMI 5 - SC - Income Tax

Reassessment notice under Section 148 held invalid for lack of jurisdiction; alleged loans, gifts, remuneration not showing income escapement

Ganga Saran And Sons Private Limited Versus Income-Tax Officer And Others

SC allowed the appeal and held the reassessment notice under s.148 invalid for want of jurisdiction. The Court found there was no adequate reason to ... Reassessment - transactions of loan and gift - validity of notice issued under s. 148 - taxable income on account of the salary with other perquisites - omission or failure on the part of the assessee to disclose material facts - B. C. MITRA J - HELD THAT:- It is clear that, in this case, the assessee did not disclose the relationship between its managing director and Deo Dutt Sharma at the time of assessment. The subsequent scrutiny of the file of the assessee and all the other connected persons revealed transactions Of gift and loan which prompted the ITO to issue the impugned notice. If in the facts, which became apparent upon a comparison of the files, the ITO came to the conclusion that a notice under s. 148 of the Act is justified it cannot be said that he acted without jurisdiction. It should be borne in mind that the only point for consideration of this court is whether there was reason for the ITO to form the belief that the assessee had been allowed excessive relief due to non-disclosure of material facts. At this stage, it is not for this court to come to a conclusion as to whether there has been actual failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. That is a question which was to be decided at the time of the assessment itself. The only question now before this court is whether there was reason for the ITO to believe that the respondent had been allowed excessive relief in its assessment proceedings. We are satisfied that on the materials which became apparent upon comparison of the files, the transactions between Deo Dutt Sharma and the managing director of the assessee and members of his family regarding loan and gift were sufficient to confer jurisdiction upon the Income-tax Officer to issue the notice under section 148 of the Act. The only question before this court is the jurisdiction of the Income-tax Officer to issue the impugned notice. The questions of non-disclosure and escapement of income from tax are questions which would be gone into at the assessment proceedings. It is not for this court to determine in an application under art. 226 of the Constitution whether there has in fact been non-disclosure or whether income has in fact escaped assessment . Those are questions to be gone into by the Income-tax Officer at the time when he proceeds to assess the respondent's income pursuant to the notice under section 148 of the Act. Appeal is allowed. BHAGWATI J. - HELD THAT:- We fail to see how this fact can lend itself to the inference that the payment of remuneration to Deo Dutt Sharma was bogus and not genuine. It is an admitted fact that Deo Dutt Sharma was the brother-in-law of Ganga Saran Sharma and there is nothing unusual in Deo Dutt Sharma giving a loan to Ganga Saran Sharma or making gifts 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 Dutt 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. We are clearly of the view that on these facts the ITO could have no reason to believe that the payment of remuneration to Deo Dutt Sharma was sham and bogus and that the amount of remuneration paid to him was wrongly allowed as a permissible deduction. Moreover, it is difficult to appreciate how the assessee could be said to be under an obligation to disclose to the ITO 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 the 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 its assessment. We must, in the circumstances, hold that neither of the two conditions necessary for attracting the applicability of S. 147(a) was satisfied in the present case and the notice issued by the ITO must be held to be without jurisdiction. Appeal allowed. Issues Involved:1. Validity of the notice issued under Section 148 of the Income-tax Act, 1961.2. Whether there was omission or failure on the part of the assessee to disclose material facts.3. Whether the Income-tax Officer (ITO) had reason to believe that income had escaped assessment.Issue-wise Detailed Analysis:1. Validity of the Notice Issued Under Section 148 of the Income-tax Act, 1961:The primary issue in this case was the validity of a notice issued under Section 148 of the Income-tax Act, 1961. The respondent, a private company, had obtained reductions in taxable income due to salary and perquisites paid to Deo Dutt Sharma, the brother-in-law of its managing director. The ITO concluded that the respondent's income had escaped assessment because the salary and emoluments paid to Deo Dutt were considered excessive and not genuine. The ITO issued a notice under Section 148, which the respondent challenged. The High Court initially quashed the notice, but the Supreme Court had to determine whether the notice was justified.2. Omission or Failure on the Part of the Assessee to Disclose Material Facts:The ITO argued that the respondent failed to disclose the relationship between its managing director and Deo Dutt Sharma, and the manner in which Deo Dutt disposed of his income, including loans and gifts to relatives. The ITO believed these facts were material and their non-disclosure led to excessive deductions being allowed. The respondent contended that all primary facts were disclosed, and the ITO's belief was based on mere inference. The Supreme Court emphasized that the assessee's obligation was to disclose primary facts, not to inform the ITO of possible inferences.3. Reason to Believe that Income Had Escaped Assessment:The Supreme Court analyzed whether the ITO had a valid reason to believe that income had escaped assessment. The Court noted that the belief must be reasonable and based on relevant and material reasons. The Court found that the ITO's belief that the remuneration paid to Deo Dutt was bogus was not reasonable. Deo Dutt was managing the Delhi branch and was paid for his services, which was found genuine by appellate authorities in previous assessments. The Court held that the manner in which Deo Dutt used his income (loans and gifts to relatives) did not justify the belief that the remuneration was sham and bogus.Conclusion:The Supreme Court concluded that neither of the two conditions necessary for attracting the applicability of Section 147(a) was satisfied. The ITO did not have a reasonable basis to believe that income had escaped assessment due to the assessee's omission or failure to disclose material facts. Consequently, the notice issued under Section 148 was held to be without jurisdiction. The appeal was allowed, the judgment of the Division Bench was set aside, and the notice dated 28th March 1968, issued by the ITO was quashed. The revenue was ordered to pay the costs of the assessee throughout.