TaxTMI 
TaxTMI 
1984 (5) TMI 94
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....mpany 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 ....
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....ement 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 r....
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....2. 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' produ....
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....ompany 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 1972-7....
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.... 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 th....
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....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 t....
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....uestion 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 par....
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....n observations at page 882 and contended that non-furnishing of certain facts where an assessee was under the bona fide 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 Shum 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....
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....n addition for liability remaining unpaid for earlier years of Rs. 1,60,067 by invoking the provisions of section 41(1). Also, he submitted, that since the accounting year of the assessee for the assessment year 1969-70 was the calendar year, in any view of the matter, the assessee was bound to pay the royalty on sales up to 6-8-1968 and there was no warrant for the ITO disallowing Rs. 74,681 in toto. Even taking the letter of the English Company at face value and construing all points in favour of the view taken by the revenue, his submission was that at the most only royalty payable from 7-8-1968 to 31-12-1968 could be disallowed. 7. The learned departmental representative, in reply, took us through the provisions of section 147(a). He stated that the word 'omission' as occurring in section 147(a) was a colourless word and which merely refers to the not doing of something. For this proposition, reliance was placed on the observations of Chagla, CJ., in Pannalal Nandlal Bhandari v. CIT [1956] 30 ITR 57, 59 (Bom.). Therefore, he submitted that where some particular primary fact had not been stated, whether such non-statement was due to an accidental omission or even due to a bona ....
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....s Trilochan Singh, a director. It was Trilochan Singh again who informed the English Company by the letter of 20-11-1968 that the agreement stood terminated and there were no further dues. Even if the letter dated 6-8-1968 was addressed to New Indo Trading Company, he submitted, it was marked for the attention of Trilochan Singh and Trilochan Singh replied on behalf of the assessee-company on 20-11-1968 expressly acknowledging the receipt of letter dated 6-8-1968. Therefore, it was clear, the learned departmental representative stated, that the assessee had full knowledge of the termination of the agreement. He referred to the provisions of section 290 of the Companies Act, 1956, and submitted that acts done by a person as a director would be valid even if it was discovered later that the appointment of director was invalid because of any disqualification. Therefore, he emphasised that merely because there has been no formal resolution of board of directors in the minutes about the termination of the agreement, the agreement stood validly terminated. He also furnished a copy of extracts from the minutes of the board of directors on dates 7-6-1962 and 2-8-1962 to show that the board....
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....l. 8. Coming to the merits of the quantum of royalty disallowed, the learned departmental representative submitted that the Tribunal in its order for the assessment year 1972-73 had given a categorical finding that remission took place in 1968. Therefore, under the provisions of section 41(1) royalty shown as payable for earlier year but not paid, it was submitted, was fully assessable in the assessment year 1969-70. He stated that all the relevant material was considered by the earlier Bench, and therefore, such finding should be considered by us as final, especially when the assessee had not contested the same for the assessment year 1972-73. Regarding the plea of the learned counsel that the assessee had offered the entire amount of royalty payable for assessment in the year 1974-75 on the ground that the remission took place in that year, the submission of the learned departmental representative was that the amounts had to be assessed in the year in which remission took place and if assessment of amounts under section 41(1) or disallowances of royalty claimed was upheld in any earlier year, it will be open to the assessee to seek for appropriate relief for the assessment year ....
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....that it has formed the satisfaction. . . ." Before applying the aforesaid tests we would set out, in extenso, the letter of the English Company dated 6-8-1968 addressed to the New Indo Trading Company but specially marked for the attention of Trilochan Singh (a director of the assessee-company): " In consequence of your visit to our office during July it is confirmed that the above mentioned agreement signed on the 5th July 1962 between Wood Auto Suppliers (P.) Ltd. and Sahney Steel & Press Works Ltd. be considered terminated. This relieves you of any payment for royalties (clause 2). 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. We look forward to receiving your confirmation that the above mentioned points will be adhered to. " We would also set out, in extenso, the reply sent by Trilochan Singh as director on behalf of the assessee-company dated 20-11-1968 to the English Company : " Dear Sirs, Re. : Collaboration Agreement dated 5th July, 1962. This has reference to your letter of the 6th August, 1968 addressed to our associat....
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....ully or truly disclose all the material facts. The material facts in the present case being the two letters referred to. The adequacy of the reasons which led to such belief is not for us to adjudicate upon. 11. The learned counsel sought to submit that where the omission was not deliberate the provisions of section 147(a) could not be invoked. To support this proposition following observations of the Kerala High Court in the case of M.O. Thomakutty was pressed into service : ". . . There is nothing to indicate that at the time the assessee filed his return his accounts relating to his Cochin business had been completed and that he knew exactly what his income was from that business. In the return he had only estimated that income to the best of his belief. The fact that when the accounts were finally closed it was seen that the income was actually much more, is not sufficient to hold that the assessee had not truly and fully disclosed his income unless there is material to show that the assessee knew at the time he submitted his return that his income was not that which was estimated by him. There is no such material...." The aforesaid observations, in our view, only go to show....
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.... be furnished and at this stage if nothing further was stated, there would be no omission. The omission would arise if specific facts are later asked, etc., and information is not given. In the latter case the observations at page 539 of Sujir Ganesh Nayak & Co.'s case were relied on to submit that if there was a false statement there would be no omission or failure to furnish particulars. The observations of the Kerala High Court in Sujir Ganesh Nayak & Co.'s case are as under: " The controversy here centres round the truth or falsity of certain loans. In other words, the facts in dispute here are the loans. They are either facts or not facts. If the loans are real transactions and so are facts then irrespective of the question whether they are primary facts or inferential facts, as they have been mentioned in the return, there is no non-disclosure for section 147(a) to apply. On the other hand, if they are bogus and consequently not facts, then also section 147(a) has no application because mention of them in the return is only a positive or affirmative statement of false transactions which are not in the region of facts and by no stretch of imagination can it be said to be a ne....
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....unt to defining the material facts as those facts which are required to be stated by the return, and none else. This in our opinion, would be an unwarranted cutting down of the natural and reasonable ambit and field of the said words. " In the same judgment the Andhra Pradesh High Court in deciding whether the provisions of section 147(a) are attracted or not stated as under : "...While it is not necessary for our purpose to hold that the assessee is guilty of a deliberately false statement in this case, it is sufficient for us to hold that there has been omission or failure, as the case may be, on the part of the assessee to disclose fully and truly all material facts necessary for assessment for that year, inasmuch as it has failed to disclose the fact that it had availed of the initial depreciation and had thus crossed the permissible ceiling, even before the said assessment year. This claim for normal depreciation, in the circumstances, necessarily implies concealment of a material fact, viz., the fact of availment of initial depreciation. That fact is material because if that fact were known, the assessee would not have been allowed the normal depreciation. " Hence, in the ....
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....rned counsel submitted that in the time available on the scrutiny that was possible within such time, such payments to the solicitors could not be identified. We have, therefore, to hold that as at present the assessee has not established that legal advice was taken at a point of time anterior to the making of claims for deduction of royalty in the accounting period referred to. 12. The learned departmental representative had also relied on the judgment of the Supreme Court in the case of Malegaon Electricity Co. (P.) Ltd. v. CIT [1970] 78 ITR 466 in support of the proposition that material considered relevant in deciding whether the claim under section 41(1) or for allowance as deduction of royalty would be relevant to decide whether invoking of the provisions of section 147(a) are in order or not. It is not necessary for us to dwell on this contention any further in the light of our findings earlier based on which we have come to the conclusion that the initiation of action under section 147(a) was in order for each of the assessment years now under consideration since the ITO had reason to believe that there was omission or failure on the part of the assessee to fully and truly....
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....ularly relevant for particular assessment years now under consideration. No doubt as stated by the learned counsel the English Company had stated in 1975 that they were entitled to royalties up to 6-8-1968, in a subsequent letter of 8-12-1978 the English Company stated that it was not known how the assessee-company continued to claim royalties after the cancellation of the agreement of 5-7-1962. However, the fact remains that the English Company did not at all write to the assessee asking for any payment of any earlier dues. They did not also take any legal action for recovery and by letter dated 20-11-1968 signed by Trilochan Singh as director on behalf of the assessee-company it was categorically stated that there was no amount payable by the assessee to the English Company for royalties and no party had any claim against other. This was only a confirmatory letter issued by the assessee and the English Company did not controvert the statement in this letter. In view of the categorical stand taken by the assessee in the letter referred to, we cannot come to a finding different from that arrived at by the earlier Bench that having regard to the correspondence by mutual consent, the....