1986 (5) TMI 1 - SC - Income Tax

Reopening assessments under s.147(a) requires material proof of omission or failure to disclose all material facts, suspicion insufficient

SC held that reopening assessments under s.147(a) requires material showing an omission or failure to disclose fully and truly all facts material to ... Validity of reopening assessments u/s 147(a) - obligation of the assessee - failure or omission on the part of the assessee to disclose fully and truly all material facts - HELD THAT:- As is well-settled now by the several authorities of this court and of several High Courts, there must be materials to come to the conclusion that there was ' omission or failure to disclose fully and truly all material facts necessary for the assessment of the year '. It 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. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, 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. There was no evidence or allegation that such an opinion was there available with the assesseecompany at the time of the original assessments. Even if such an opinion, as opinion evidence be considered as a basic fact, a question on which we need not express any opinion now, 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. In this case, it is necessary, therefore, to bear in mind that 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. 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 of 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 auditor's opinion about the reasonableness was there. Secondly, what would be reasonable or not would be an inference of the auditor. The amounts spent, the nature of the work alleged to have been done by the 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 auditor's 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. In that view of the matter, it cannot be held that there was failure to disclose fully and truly all basic facts. From the certificate for the year 1963-64, it appears that a very large amount of money was being diverted from the company in India to London-a very familiar pattern of colonial exploitation-but it raises only a suspicion that there might not have been a full disclosure. Belief, however, cannot be based on suspicion. In that view of the matter, in our opinion, 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. Issues Involved:1. Validity of reopening assessments under Section 147(a) of the Indian Income-tax Act, 1961.2. Whether there was failure or omission on the part of the assessee to disclose fully and truly all material facts.3. Sufficiency of grounds for the Income-tax Officer to believe that income had escaped assessment.4. The distinction between primary facts and inferential facts in the context of disclosure obligations.Issue-wise Detailed Analysis:1. Validity of Reopening Assessments under Section 147(a)The primary issue was whether the reopening of the assessments for the years 1957-58, 1958-59, and 1959-60 under Section 147(a) of the Indian Income-tax Act, 1961, was valid. The initial reopening was challenged by the assessee on the grounds that there were no materials to initiate such reopening. The learned single judge of the High Court quashed the notices, but the Division Bench reversed this decision, leading to the present appeals.2. Failure or Omission to Disclose Fully and Truly All Material FactsThe court examined whether the assessee failed to disclose all material facts necessary for the assessment. The assessee had consistently claimed deductions for London office charges, which were allowed by the Income-tax Officer in the original assessments. The Division Bench held that the assessee failed to disclose the system of certification by the auditor of the parent company fixing what percentage would be reasonable for debiting the assessee company in India. However, the Supreme Court found that all basic facts were disclosed, including the nature and quantum of work done by the London office and the basis of allocation of expenses.3. Sufficiency of Grounds for the Income-tax Officer's BeliefThe court reiterated that for reopening under Section 147(a), the Income-tax Officer must have reason to believe that income had escaped assessment due to the assessee's failure to disclose fully and truly all material facts. The Supreme Court noted that the mere production of evidence before the Income-tax Officer was not enough; there might be an omission or failure to make a full and true disclosure if some material for the assessment lay embedded in that evidence. However, in this case, the facts were disclosed, and the opinion of the auditors for the assessment year 1963-64 that 10% would be reasonable charges could not be considered a basic fact that was not disclosed.4. Distinction Between Primary Facts and Inferential FactsThe court emphasized the distinction between primary facts and inferential facts. The obligation of the assessee was to disclose primary facts fully and truly. The Supreme Court found that the assessee had disclosed all primary facts, such as the nature of work done by the London office and the basis of allocation of expenses. Whether the expenses were reasonable or excessive was an inferential fact, which the Income-tax Officer had to determine based on the disclosed primary facts.Conclusion:The Supreme Court concluded that the reopening of assessments under Section 147(a) was not valid as the assessee had disclosed all primary facts fully and truly. The opinion of the auditors for the assessment year 1963-64 could not be considered a basic fact that was not disclosed. The Division Bench's decision was set aside, and the judgment of the learned single judge was restored. The assessee was entitled to the costs of the appeals.