Supreme Court of India
INDIAN OIL CORPORATIONversusINCOME TAX OFFICER, CENTRAL CIRCLE V, CALCUTTA & ORS.
- Citation
- 1986 INSC 115
- Decided
- 8 May 1986
- Disposal
- Appeal(s) allowed
- Bench
- R S PATHAK
Holding
The Court held that the assessee had disclosed all primary facts, there was no failure to disclose fully and truly, and the revenue’s belief did not satisfy the conditions for reopening under section 147(a).
Summary
The Indian Oil Corporation, a UK‑incorporated company with its principal place of business in India, claimed large deductions for London management expenses incurred by its parent company, Burmah Oil Co. Ltd., in its income‑tax returns for the years 1957‑58 to 1959‑60. The Assessing Officer, relying on a 1963‑64 auditor's certificate that only 10% of such expenses were reasonable, issued reassessment notices under section 148, alleging that the corporation had failed to disclose material facts and that income had escaped assessment under section 147(a). The corporation challenged the notices, arguing that all primary facts were already disclosed and that the revenue’s belief was based on an inferential fact, not a failure of disclosure. The Supreme Court held that the duty of disclosure is limited to primary facts, which were fully disclosed, and that the revenue’s belief did not satisfy the two conditions required for invoking section 147(a). Consequently, the Court set aside the division‑bench order, restored the single judge’s decision, and allowed the corporation’s appeals.
Issues considered
- The conditions required under section 147(a) of the Income‑Tax Act, 1961 for reopening assessments beyond four years.
- Whether the assessee failed to disclose fully and truly all material primary facts concerning London management expenses and the auditor's certificate.
- Whether the revenue's reliance on an auditor's opinion for the year 1963‑64 suffices as a basis for reopening under clause (a) of section 147 or only under clause (b).
- If the primary facts were already known to the Assessing Officer, can a belief of non‑disclosure be sustained?
Legislation cited
- Income Tax Act, 1922s. 34
- Income Tax Act, 1961s. 147(a), s. 148
Subjects
Income TaxSection 147ReassessmentNon‑disclosurePrimary factsLondon management expensesAuditor's certificateTax avoidanceAssessment reopening
Judgment
1107
INDIAN OIL CORFOKATION A
v.
1NCt14K TAX OFFICER, CEITTRAL CIRCLE V,
CALCU'ITA & 'ORS.
MAY 8, 1986
B
[R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.]
Income Tax Act, 1961 - S.147(l)(a) - Income escaping
assessment - Initiation of proceedings for reassessment -
-tNecessary conditions - What are.
The assessee at the relevant time was a company c
incorporated under the laws of the United Kingdom, and had its
·-L principal place of business in India. The assessee was all
ralong assessed under the Indian Income Tax Act, 1922. The
·assessee had claimed deductions every year of certain expenses
tamounting to L 1,00,000 or over as administrative charges
incurred by the Burmah Oil Company Limited of London for D
management and secretarial work carried on on behalf of the
assessee in London. L 1,00,000 represented approximately 40%
of the head office expenses of the London Company which,
according to assessee, was a reasonable allocation having
regard to the work done by the London Office on behalf of the
assessee. As similar organisational work was done in London E
¥through the London Company, the London office was managing
several companies and debiting prorata to the companies whose
.. affairs they were managing and thereafter the assessment was
completed on that basis •
,~ During the assessment for the year 1953-54, the assessee F
had furni$hed in support of its claim for London Management
expenses, certificate from the London Auditors that the sum
'\specified in the certificate was reasonable having regard to
tbe records and materials produced before the auditors , which
was about 10% of the total administrative expenses incurred by
the Burmah Oil Company Limited, London. The Income-Tax
G
Officer found that such expenses debited actually in the
earlier years were far in excess of this percentage. The
~ assessee was, therefore, required to furnish a similar
certificate for each of the assessment years 1957-58, 1958-59
.. and 1959-60. No such certificates were produced by the
assessee and by three notices dated November 25, 1965 under
H
•
1108 SUPREME COURT REPORTS [1986] 2 S.C.R.
A
s.148 of the Income-tax Act 1961, the Income Tax Officer
notified that he had reason to believe that the assessee' s \
income chargeable to tax for each of the said assessment year
had escaped assessment within the meaning of s. 147(a) and he
proposed to reassess the income for the said years and the
assessee was required to furnish the returns.
B
The assessee challenged the said notices under Art. 226
of the Constitution on the ground that there was no material
to reopen the assessments. A Single Judge of the High Court"t
quashed the notices and held that all the facts in possession
of the assessee were placed before the taxing authority prior
to making of the assessment; that it was for the taxing
c authority either to accept the claim or to reject the claim
either wholly or in part; that after having accepted the claim1"
in spite of non-production of the relevant auditors'
certificate which was asked for at one stage the revenue could~
not later turn round and say that the income of the assessee
D
had escaped assessment or been under-assessed due to the
failure of the assessee to disclose those very auditors'
reports and that the under assessment, if any, was due to the
laches of the Revenue and not due to any act or omission on
the part 0f the assessee.
In the appeal filed by the Revenue, the Division Bench'!'
E
set aside the decision of the Single Judge, upheld the notices
and held that the assessee had failed to disclose; (1) the
basis of allocation of expenses; (2) correspondence between t
the London principal and the assessee company on the relevant
subject; (3) existence of auditors' certificate fixing~,
percentage that would be reasonable for allocation in respect
F
of the subsidiary companies including the assessee and,
therefore, there were prima fade materials to form the belief f
that there was failure and omission in the part of the'
assessee to disclose fully and truly all the relevant and
material facts which led to the escapement of income or under
assessment of income of the assessee company.
G
Allowing the appeals of the appellant-Corporation to ,..
this Court,
HELD: 1. To confer jurisdiction under clause (a) of
s.147 of the Income Tax Act, 1961 beyond the period of four
H
INDIAN OIL CORPN. v. I.T.O. 1109
A
years but within a period of eight years from the end of the
+ relevant year under s. 148 of the assessment year, two condi-
tions were required to be fulfilled: first is that the
Income-tax Officer llllSt have reason to believe that the income
profits or gains chargeable to tax had been underassessed or
escaped assessment; the second was that he must have reason to B
believe that such escapement or underassessment was occasioned
by reason so far as relevant for the present purpose to
disclose fully and truly all material facts necessary for the
1 assessment of that year. Both these conditions are conditions
precedent to be satisfied. [1121 G-H; 1122.A-B]
2. Section 147(a) postulates a duty on every assessee to c
'1..-disclose fully and truly all material facts necessary for the
r assessment. Therefore, the obligation is to disclose facts;
' secondly those which are material; thirdly the disclosure llllSt
+be full and fourthly true. (1125 C-D]
3. What facts are material and necessary for assessment D
will differ from case to case. In every assessment proceed-
ings, 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.
From the primary facts in his possession, whether on
¥ disclosure by the assessee, or discovered by him on the basis E
of the facts disclosed, or otherwise, the assessing authority
has to draw inferences as to certain other facts. But once the
primary facts are with the taxing authority :Lt is for him to
draw inferences. It is not necessary for the assessee to draw
'i inferences for him. (1125 D-F]
F
Calcutta Discount Co. Ltd. v. Income-tax Officer,
,~tea District I, Calcutta and Another, 41 ITR 191 at
199, S. lfarayanappa and Others v. Coanissiooer of Income-tax,
Bangalore, 63 ITR 219, eo-1.ssiooer of Income-tax, West
Bengal, and Another v. Bemchandra Kar and Others, 77 ITR 1,
Income-tax Officer, I-Ward, Hundi Circle, Calcutta and Others
v • Madnanf Engineering Worlts Ltd. , 118 ITR 1, Ganga Saran & G
.1 Sona P. Ltd. v. Income-tax Officer and others, 130 ITR 1 at
..J. 13, Inco.e Tax Officer, I Ward, Dlstt. VI, Calcutta and others
1
"I' v. -akhwmf Kewal Das, 103 ITR 437 and Sheo Nath Singh v.
Appellate Assistant Coaaissiooer of Inc011e-Tax (Central),
Calcutta and others, 82 ITR 147 at 153, relied upon.
H
1110 SUPREME COURT REPORTS [1986] 2 S.C.R,
A
P.R. lilkharjee v. ec-issiooer of Income-tax, West
Bengal, 30 ITR 535 and Uazi Amir &hd. Mir Aimed v. ~
Comd.ssioner of Income-tax, Allritsar, 110 ITR 630, approved.
4.(i) 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
B
assessee was guilty in not disclosing the basic facts.
[1127 F]
t
4.(ii) In the instant case, 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
c Company who were managing the affairs and doing certain works~
for the assessee as well as certain allied companies belonging 1
to Burmah Oil Corporation Group. The expenses for these allied i
concerns were on pro-rata basis charged by the London office
and a certain proportion of the expenses were allocated to
different companies and they debited certain portions, i.e.
D
these amounts were realised from the assessee and allied
companies in proportion to which the London company debited ~·
them those charges. This fact was known all along to the
Revenue while making the original assessment for the relevant
assessment years. The audit report of the assessee company was
supplied but it is not clear whether the audit report of the '
E
London company was supplied and was asked for. It is unlikely
that when Londo!\ company was debiting the assessee company
and other companies in the audit report every year, there -
would be any note that such debits by which the London company
got certain money which were excessive i.e. the London company r•
realised more than it had actually incurred of the expenses.
F
In any event, however, the aa:iunt realised would be mentioned
in the audit report as a basic fact. That has been disclosed,,
to the Revenue at the time of the original assessment. The
nature and the quant1111 of the work done had also been
disclosed. Whether it was excessive or not was an inferential
fact. The Income-tax Officer, from time to time had some
G
doubts as to whether the entirety of the expenses debited were
really incurred for the assessee company by the London company 1 _
or whether that was unreasonable or excessive having regard to
the magnitude of the work done by the London company but that .,..
would be a matter of opinion and on inference drawn from the
aa:iunt of the work in correlation to the aD:>Unt debited the
H fact what was done, what was being claimed by the London
INDIAN OIL CORPN. v. I.T.0. 1111
A
office and the difficulties in producing the accounts or the
+ opinion of the auditors for which the Income-tax Officers had
j. called upon the assessee were all known to Income-tax Officers
at the time of making the original assessments. In spite of
the same, the Income-tax Officer chose to assess the assessee
in the manner he did. In the light of the opinion of the B
Auditors for the assessment year 1963-64 wherein his opinion
that ten per cent would be reasonable charge might be good
-t information for which the assessment of the assessee could be
reopened under clause (b) but on this basis alone it could not
be said that the assessee had failed to disclose fully and
truly all basic facts at the time of the original assessment
of the relevant assessment years. There was no evidence or c
'tallegation that such an opinion was there available with the
. assessee company the time of the original assessments. Even if
+-such an opinion as opinion evidence be considered as a basic
fact, a question on which no opinion is required to be ex-
pressed, there was no evidence that such opinion was with the
assessee at the time or before the completion of the original D
• assessments for the relevant assessment years. [1125 F-H;
1126 A-H; 1127 A]
4.(iii) All the basic facts in this case were disclosed,
.f it was however not disclosed as to what was the opinion of
the Auditor, as to what is reasonable allocation share of the E
- assessee having regard to the amount of work done on behalf
of the assessee company of the London office expenses. 'nlere
is no conclusive evidence that at the relevant time i.e. at
the time of filing of the return before the assessments, such
•i Auditors' opinion about the reasonableness was there.
Secondly, wha,t would be reasonable or not would be an
F
inference of the auditor. The am:iunt spent, the nature of the
'\work alleged to have been done by London office on beha'lf 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 auditors' opinion. It was
G
stated that such opinion could not be supplied. In spite of
_., the same, the Income-tax Officer did not choose to make a best
i judgment assessment and did not draw any adverse inference
against the assessee. It cannot, therefore, be held that there
was failure to disclose fully and truly all ba 1 f
[1127 A-El s c acts.
H
CIVIL APPELLATE JURISDICTION
1189-1190 OF 1974 CIVIL APPEAL NOS,
1112 SUPREME COURT REPORTS [19861 2 s.c.R.
A
From the Judgment and Order dated 7 .12. 1973 of the
Calcutta High Court in Appln. ~o. 189 and 196 of 1971. ~
Dr. Devi Pal, Ms. M. Seal, D.N. Gupta, H.K. Datt and
Miss Mridul Ray for the Appellant.
B C.M. Lodha, Dr. V. Gaurishankar, Miss A. Subhashini and
C.V. Subba Rao for the Respondents.
The Judgment of the Court was delivered by
SABYASACHI MUKHAR.JI, J. Whether the reopening of the
c assessments of the assessee under section 147(a) of the Indian
Income Tax Act, 1961 (hereinafter referred to as the 'Act') _.,
was valid, is the question involved in these appeals by 1
special leave from the Bench decision of Calcutta Hlgh Court i
dated 7th December, 1973. The assessment years involved are
1957-58, 1958-59 and 1959-60.
D
It may be ment toned that on notices being issued for
reopening of the assessments under section 148 of the Act
under condition 147(a) of the sald Act, the assessee
challenged the said notices on the ground that there were no
•
E
materials to initiate such reopening. Such challenge was
upheld by the learned single judge of the High Court and ..
-
the notices in question were quashed.
The revenue being aggrieved preferred appeals before the
division bench of the Hl.gh Court. The division bench of the
High Court reversed the findings of the learned trial judge ~·
F and the notices were upheld. Hence these appeals.
•
The assets and liabilities 'of erstwhile the Assam Oil (
Company have since then vested in the Indian Oil Corporation
and on an oral application having been made on behalf of the
asses see, we have directed that the name of the Indian Oil
G Corporation be substituted.
The assessee at the relevant time was a company incor- ,.,
porated under the appropriate laws of the United Kingdom, and ~
had its principal place of business at the relevant time in Y
India at Digboi in the State of Assam. It carried on business,
H
inter alia, in oils and lubricants. As t'1e years involved were
INDIAN OIL CORPN. v. I.T.O. [Sl\BYASACHI MUK!IARJI, J.] 1113
A
j prior to the introduction of the Act in question, the assessee
was all along assessed under the provisions of the Indian
Income-Tax Act, 1922 (hereinafter called the '1922 Act'). In
its assessment under the 1922 Act, the assessee had claimed
deductions every year of certain expenses amounting to f,
1,00,000 or over as administrative charges incurred by the B
Burmah Oil Company Limited of London for management and
secretarial work carried on on behalf of the assessee in
_,London. For the assessment year 1951-52, it might be mention-
ed, the Income-tax Officer wrote a letter to the assessee
~ asking for certain informations and one of the informations
__. asked for was regarding London charges. The assessee was asked
to furnish a schedule in respect of the London charges and c
-i-also to let the Income-tax Officer know whether any reserve
r had been debited to this account of London charges. The letter
~was dated 19th December, 1952. The assessee by its letter
replied to that query where it informed the Income-tax Officer
that as advised in connection with the 1950-51 assessment,
London charges being about ~ 1, 00, 000 represented approxi - D
mately 40% of the head office expenses of the London Company
being the charges made by the Burmah Oil Company for manage-
ment and secretarial work carried out on behalf of the
assessee company in London covering Stores Purchasing,
Accounting, Staff, Geological and other Departments. The
cf assessee further informed the taxing authorities that it had
E
- been advised by its London office that the amount represented
a reasonable allocation having regard to the work done by the
London office on behalf of the assessee. As the point in
question in these appeals is whether there was failure or
>-1 omission on the part of the assessee it is necessary to refer
in detail to the correspondence. For the assessment year
F
1951-52 in response to the enquiries the assessee made it
'\clear that the London charges represented the charges made by
the Burmah Oil Company which managed the assessee company
along with other companies in respect of the management work
and secretarial work carried out in London covering the
various items indicated before. In other words as similar
organisational work were done in London through the London G
"I company, the London office was managing several companies and
i debiting pro-rata to the companies whose affairs they were
managing. The assessment was completed thereafter apparently
on the said basis.
Similarly for the assessment year 1953:·54, it appears H
1114 SUPREME COURT REPORTS [19861 2 s.c.a.
A
that there was discussion between the Income-tax Officer and t
the assessee and certain queries were made in respect of the
London office charges amounting to f; 1,00,000 included in the
trading account for l952. The assessee by its letter dated 9th
December, 1953 informed the Income-tax Officer that the
assessee's London Principals haa advised them that the total
B expenses of the London office for 1952 amounted tot 2,75,000
of which f< 2,55,000 was charged out to the subsidiary
companies for services rendered by the parent company. It was-+-
further informed that by far the bulk of these Head Office
Expenses was comprised of salaries and off ice rents paid, and
apart from a comparatively negligible amount of work not
c connected wlth the subsidiary companies, the whole of head
office expenses might reasonably be allocated to the-f'
subsidiary trading companies. The t\.qsam Oil Company's share of )
the amount charged out was ~ 1,00,000 t.e. approximately 4o:q
and the London office advised so. It was communicated to the
assessee that this amount was a 'reasonable allocation having
D regard to the amount of work done on behalf of the assessee
company', It was, further, stated that Assam Oil Company was
the largest of the trading subsidiaries, and in addition was
by far the major producing company in the group. In short the
amount, according to the assessee, was a reasonable pro rata
di vision of the total charge for Management expenses and was *
E in effect composed almost entirely of a proportion of salaries
and rents. On the aforesaid basis the assessment was completed
for the assessment year on 21st March, 1955.
For the assessment year 1954-55 by letter dated 12th
July, 1956, the Income-tax Officer made certain enquiries r.
F asking for details of services rendered and for copies of the
correspondence between the asses see and its pa rent company
"regarding fixation of the amount in 1953 at :ff 1,10,000" of(
London expenses.
The assessee by its letter dated 14th November, 1956
G replied to the said queries. The assessee stated that the head
office of this company was in common with the parent company
and other member companies of B.O.C. group situated in the
same building in London. The services rendered by Head Office ~
covered the central administration and overall control. It was
mentioned that B.O.C. as well as the assessee company were
H
,;•
INDIAN OIL CORPN. v. I.T.O. [SABYASACHI MUKHARJI, J,] lll5
A
; companies registered in U.K. ltd was mentiionedfbyfithe assessee
that the central accounting an preparat on o na1 accounts
were done in London. Arranging the purchase of plant and
machinery stores and all other itens were done by London,
inter alia, as follows:
B
"The head office of this company is in connoon with
the parent company and other member companies of
the B.O.C. group situated in th" same building in
London.
The services rendered by Head office cover (a) the
central administration and overall control. (You C
wi 11 bear in mind that this is a U. K. registered
Company).
(b) The Central accounting and preparation of
final accounts.
D
(c) Arranging the purchase of plant and machinery
stores and all other itens not purchased locally.
(d) The supply of all the advice and technological
data relating to geology chemistry, engineering and
kindered subjects which are essential to the E
routine operation of the Oil Industry.
'Ilte charge of 1' 1,10,000 represents our share of
the staff salaries, wages, fees rent rates and
taJtes, insurance and other expenses incurred at
head office. We do not have correspondence with the F
parent company in this connection."
It may be mentioned that in the last sentence it was
stated that the assessee company did not have correspondence
with the parent company in this connection.
G
On 19th June, 1957, there was a letter by the Income-tax
Officer asking the assessee to explain the basis of allocation
... of ff;, 1,10,000 for the year 1953. The Income-tax Officer drew
attention of the assessee that the assessee had written that
there was no correspondence wt th the parent company on this
matter. The assessee was asked to explain the basis of the H
1116 SUPREME COURT REPORTS [1986] 2 S.C.R.
A
allocation and how it was fixed at ii 1, 10,000 for the year
1953. The assessee was further asked to explain the item
"Purchase of plant and machinery" in the list of services
rendered by Head Office in additl n to the service of central
\
administration and overall control. •
B By another letter dated 3rd January, 1958, the Income-tax
I
Officer informed the assessee that the assessee had not i
written what the assessee 's London office had to say about ~
basis on which the amount oft 1,10,000 claimed as a deduction
from the Indian profits, was arrived at. The Income-tax
Officer further informed the assessee that in the absence of
C the required particulars he would have to disallow a part of
the expenses claimed and also to capitalise a portion of the ;
remaining part as relating to purchase of plant and machinery.
To this the assessee by its letter dated 16th January, 1958 ~
informed that regarding letter ref erred to hereinbef ore it was
difficult to add to the explanation given in the previous
D letter of the assessee and this position was explained in the
letter dated 14th November, 1956 to the colleague of the
I. T.O. in Dibrugarh. The assessee further went on to state
that the assessee did not have any staff as such in London.
All such staff were employed by the Burmah Oil Co. Ltd. who
paid their salaries and wages and who paid all the other
E expenses incurred in London. The assessee further asserted 1
that the Burmah Oil Co. Ltd. staff was used not only on the
work of this company but all of the other companies in the
group. At the end of the year, the Burmah Oil Co. Ltd.
estimated how much of the total expenditure it had to incur to
coordinate the activities of all the group companies to which •
F it was applicable. This was not allocated on any fixed
mathematical basis, but in proportion to the time which had
been spent on the various companies affairs taking account of -,
the relative complexity of the work on each company. In
respect of the year under review, the assessee asserted that
they were advised that in fact the expenses of the London
G Office were such as to have justified a higher allocation to
the subsidiary companies. The assessee was, therefore, unable
to agree to any disallowance in respect of these expenses. The
assessee further asserted that nor could it agree to the
suggestion of the Income-tax Officer that some part of the
salaries, wages etc. paid in London should be disallowed
H merely because during the year one of the incidental services
INDIAN OIL CORPN. v. I.T.O. [SABYASACHI MUKHARJI, J,) 1117
A
carried out was the purchase of equipment. The assessee
1 asserted that London staff was employed mainly on normal ad-
ministrative matters whether or not in any particular year
plant or equipment was purchased.
The Income-taJ< Officer incidentally Mr. D.G. Pradhan B
wrote on 26th December, 1958 that he would be obliged if the
assessee could obtain in due course auditors' certificates
__,regarding 'reasonableness of the expenses allocated by the
Burmah Oil Company Ltd. to the assessee company for supervi-
sion and control expenses incurred un U.K.'
The assessment thereafter was completed by the said D.G. c
't Pradhan as Income-tax Officer for 1954-55 on 15th January,
I 1959 i.e. within three weeks after the said letter.
For the assessment year 1955-56, the Income-tax Officer,
another incumbent namely S. S.M. Islam by a letter dated 8th
October, 1956, asked for the details of the services rendered D
and to send a copy of correspondence between assessee and
parent company regarding fixation of the amount of London
charges.
The assessee on 12th July, 1957 by a letter objected to
"* the suggestion that' London office charges were not allowable E
and pointed out that they had always been allowed in the past.
In any event the assessee asked for time to furnish the
details.
>1 On 16th January, 1959, Shri D.G. Pradhan, Income-tax
Officer, completed the assessment for the assessment year F
1955-56 allowing the claim for London charges in full. On the
'same day, Shri Pradhan completed the assessment for the
'assessment year 1956-57 and 1957-58 and allowed London charges
in full.
For the assessment year 1959-60, the assessee wrote on G
27th July, '1961 to the Income-tax Officer pointing out that it
did not incur any London office expenses as such. The Burmah
-. Oil Co. Ltd. which had e~loyed all the staff, incurred all
the expenditure and passed to each subsidiary co~any a charge
which was based on the proportion of the total work carried
out in London for that subsidiary and which could be described H
as management charges.
ll18 SUPRF.ME COURT REPORTS [19861 2 s.c.R.
A
The Income-tax Officer, Sri G.P. Gupta completed the t
assessment for the assessment year 1959-60 and allowed the
London charges in full.
The assessments for the years 1957-58, 1958-59 and
1959-60 were made more or less on the basis of profit and loss
B account of the assessee for those years, in which London
Office charges had been debited.
The assessment for the assessment year 1959-60 was
r
completed on the basis of the Prof its &Loss Account which had
debited an amount of fi 2, 50,000 of London Management expenses.
c The Income-tax Officer thereafter addressed three letters
dated 21st Oct.Jber, 1965 to the assessee in respect of the i'
assessment years 1957-58, 1958-59 and 1959-60 respectively I
pointing out that during the assessment for the year 1953-54, ·t
the assessee had furnished in support of its claim for London
Management expenses a certificate from the London auditors
0 that the sum specified in the certificate was reasonable
having regard to the records and materials produced before the
auditor. The certificate revealed that the reasonable charges
in relation to the total administrative expenses incurred by
the Burmah Oil Co. Ltd. London was about 10%. The Income-tax
Officer further found that such expenses debited actually in t
E the earlier years were far in excess of this percentage. The
assessee, was therefore, required by the Income-tax officer to
furnish a similar certificate for each of the aforesaid three
years based on an examination of the records and materials,
failing which it should be constrained to conclude that the
claim by way of London Management fee was excessive and t-•
F arbitrary. No such certificates were produced by the assessee
and by three notices dated 25th November, 1965 under section
148 of the Act, the Income-tax Officer notified that he had
reason to believe that the assessee's income chargeable to tax
r
for each of the assessment years had escaped assessment within
the meaning of section 147 of the Act and he proposed to
G reassess the income for the said years and the assessee was
required to furnish the returns. The notices were issued under
clause (a) of section 147 of the Act. •
~
The learned single judge of the High Court noted the
relevant provisions of law and was of the opinion that all the
H facts in the possession of the assessee were placed before the
INDIAN OIL CORPN. v. I.T.O. [SABYASACHI MUKHAR.JI, J.] 1119
A
taxing authority prior to the making of the assessment. It was
1 held that it was for the taxing authority either to accept the
.. c!aim or to reject the claim either wholly or in part. After
having accepted the claim in spite of the non-production of
the relevant auditor's certificate which was asked for at one
stage, it was held that the revenue could not later turn round B
and say that the inco11¥> of the assessee had escaped assessment
or been underassessed due to the failure of the assessee to
disclose those very auditors' reports. The learned judge felt
~ that the underassess11¥>nt, if any, was due to the laches of the
- •
revenue and not due to any act or omission on the part of the
assessee and notices under section 148 had to be quashed.
1'
In answer to the rule nisi issued, the respondents-
Income- tax Officers who affir11¥>d the affidavits in opposition
were not the Income-tax Off ice rs who had made the original
c
-~ assessments nor were they the Inco11¥>-tax Officers who had
issued notices for the reassess11¥>nt. The respondent Income-tax
Officers who affir11¥>d the affidavits in opposition could only D
make- the state11¥>nts on the basis of the information received
• from the records and the only way they could show cause was by
repeating that in view of the materials on the records they
had reason to believe· that due to the failure and/or omission
of _the assessee to disclose fully and truly all material
i facts, the income had escaped assessment and they bona- fide
E
believed the same. But the report made ·for obtaining sanction
of the Colllllissioner was placed before the learned Judge and
_.. the learned judge had noted that in the said report, the
Income-tax Officers had pointed out that for the assessment
.1 year 1963-64, it was found from the report of the London
auditors that the management fee charged by the Burmah Oil Co.
F
Ltd., London, was about 10% of its total administrative
\ charges and that the auditors certified for that year that
percentage was reasonable. The reports of the Income-tax
Officers further continued to state that a perusal of the
earlier records revealed that in the years prior to the
assessment years 1963-64 it had been claiming by way of London
G
management fee amounts far in excess of the 10% certified by
., the auditors as reasonable for the year 1963-64. The
assessee-company was, therefore, required to produce similar
i certificates for the earlier years but it had failed to do so
o'! the ground that no records were maintained by the parent
company on the work relating to the assessee 's affairs. The
H
1120 SUPREME COURT REPORTS [1986] 2 S.C.R.
A
allocation of London management fee was thus arbitrary and
devoid of any basis and was only a means of avoiding taxatidh t
by debiting excessive sums by way of management fees unrelated
to the extent of the services rendered. By reason of the
assessee's failure, the report went on to say, to disclose the
correct facts its income had been found to have escaped
B
assessment and sanction to reopen the same was, therefore,
.requested. As the assessee was similarly informed by the
respondent's letter that he considered that the assessee's
claim for deduction of th_e London management expenses in the+-
past years to be excessive in the light of the London
auditor's report for the assessment year 1963-64. This, the
c learned judge took to be the basis for reopening of the
assessment. The learned judge after referring to the relevant'"(.
authorities, was of the view that reopening in this case was I
done as it appeared to the learned trial judge on the ground-~
on the basis of auditors' report for the assessment year
1963-64. This might be an information which the Income-tax
l)
Officer might have received and on that basis reopen the
assessment. The learned single judge was of the view that this
might have been a good ground for action under clause (b) of
section 147 of the said Act but lt could not be treated as
good ground for reopening under clause (a) of section 147 on
the ground that there was failure or omission on the part of
E
the assessee to disclose fully and truly all relevant and *'
material facts. It ls true as the learned Judge accepted the
position and was reiterated here that if on the records it
appeared that there were some materials to form the be lief
that there was omission or failure on the part of the assessee
to disclose fully and truly all relevant and material facts, ~
F
the initiation of the proceedings under clause (a) of section
147 cannot be questioned.
Aggrieved by the said decision of the learned trial
judge, as mentioned hereinbefore, the revenue had challenged
r
the decision before the division bench of the Calcutta High
G
Court. The <livision bench after setting out the relevant facts
an<l the contentions and after referring to the judgment of the
learned trial judge and to the correspondence, observed that •
the assessee was guilty in the facts and circumstances of the t-
case of not disclosing the system •of certificate by the
auditor of the parent company fixing what percentage would be
H
l
INDIAN OIL CORPN, v. I,T,O. [SABYASACHI MUKHARJI, J,] 1121
A
reasonable for debiting the assessee company in India. It was
1 further observed by the Division Bench that the existence of
such an important material as the auditor's certificate of
that nature did not appear to have been known to the
Income-tax Officers at the stage when assessments were previ-
ously completed for the assessment years 1951-52 right upto B
1958-59. Such a document, according to the Division Bench of
the High Court, if existing would be very material ·document
and the fact that such a document was not brought to the
~ notice and rather misleading answers, according to the learned
-
'
•
judges, would amount to non-disclosure of all relevant facts •
The learned judges were of the view that the assessee had
failed to disclose: (1) the basis of allocation of expenses;
(2) correspondence between the London principal and the
'f
assessee company on the relevant subject; (3) existence of
· auditor's certificate fixing percentage that would be reason-
c
l able for allocation in respect of the subsidiary companies
including the asses see. These were some of the important
materials which the assessee failed to disclose • D
., The learned judges referred to some of the authorities
and observed that counsel for the assessee before the learned
trial judge had never denied existence or possible existence
of the auditor's certificate in London but had only pleaded
, ~ for time and opportunity to the assessee but after sufficient E
time had been given and impugned notices were issued,
reopening was challenged. It was held, therefore, that in this
... case there were prima facie materials to form the belief,
according to the division bench, that there was failure and
'1 omission on the part of the assessee to disclose fully and
truly all the relevant and material facts which led to the F
escapement of income or underassessment of income of the
) assessee company.
The principles on this branch of law are well settled.
To confer j11risdiction under clause (a) of section 147 G
of the Act beyond the period of four years but within a period
of eight years from the end of the relevant year under section
148 of the assessment year, two conditions were required to be
i fulfilled: first is that the Income-tax Officer 1111st have
reason to believe that the income profits or gains chargeable
to tax had been underassessed or escaped assessment; the H
1122 SUPREME COURT REPORTS [1986] 2 S.C.R.
A
second was that he mllst have reason to belleve that Sllch
escapement or llnder-assessment was occasioned by reason so far ~
as relevant for the present purpose to disclose fully and
truly all material facts necessary for the assessment of that
year. Both these conditions are conditions precedent to be
satisfied. See in this connection the observations of this
B Court in Calcutta Discount Co. Ltd. v. Income-tax Officer,
~anies District I, Calcutta and Another, 41 I.T.R. 191 at
199. The obligation, therefore, of the assessee primarily was
to disclose fully and trnly all material and relevant facts; f-
that the obligation was only of disclosing the basic facts but
not obligation to disclose what inference had to be drawn from
c such facts. It was further observed by Hidayatullah, J. as the
learned judge then was, that the mere production of evidence
before the Income-tax Officer was not enough and there might j
be an omission or failure to make a full and true disclosure, f
if some material for the assessment lay embedded in that 1
evidence which the assessee could uncover but did not. 1f
D there was such a fact, it was the dllty of the assessee accord-
ing to the said learned jlldge to disclose it. There was
difference of opinion amongst the learned judges in that case
on certain aspect but for the purpose of this appeal, it is
not necessary to refer to the same.
E In the case of S. Narayanappa and Others v. Coomissioner t
of Income-tax, Bangalore, 63 I. T. R. 219 this Collrt again
reiterated the conditions required to be fulfil led t0 confer
jllrisdiction on the Income-tax Officer to issue the notice
under secti0n 34 of the 1922 Act which is in pari-materia
..
with section 147 of the Act. It was reiterated that if there ~
F were in fact some reas~nable grounds for the Income-tax
Officer to believe that there had been any non-disclosure as
regards any fact which could have a material bearing on the 1
question of under-assessment or escapement, that would be 1
sufficient to give jllrisdiction to the Income-tax Officer to
issue the notice for reopening. Whether those grounds were
G adequate or not was not a matter for the court to investigate.
In other words, it was emphasised, that sufficiency of the
grounds which induced the Income-tax Officer to act was not a •
justiciable issue. It was of course open for the assessee to
contend that the Income-tax Officer <iid not hold the belief '"
that there had been such non-disclosure. In other words, the
H existence of the belief could be challenged by the assessee
bllt not the sufficiency of the reasons for the belief.
INDIAN OIL CORPN. v. I.T.O. [SABYASACHI MUKHARJl, J.] 1123
A
The division bench of Calcutta High Court in P.R.
~ lilk.harjee v. eo..issioner of Income-tax, West Bengal, 30
•. I.T.R. 535 had reiterated that the assessee could only be held
• guilty of failure to disclose fully and truly all material
facts only when the assessee was aware of all the material
facts. B
This Court had occasion in c:o.nissioner of Inc~ax,
West Bengal, and Another v. Hemchandra Kar and Others, 77
-1i I.T.R. 1 to examine this question. There the assessee, a Hindu
undivided family consisting of six members, had been assessed
for the assessment year 1946-47. Following the demonetisation
of high denor:ination notes in January, 1946, the assessee c
encashed notes of the value of Rs. 19,000 and five members of
y the family encashed notes of the aggregate value of Rs.
, l, 10,000, The Income-tax Officer reopened the assessment of
~ the assessee and of the five members and by his reassessment
orders made on 31st January, 1955 included the sum of Rs.
19, 000 in the reassessment of the family and the sum of Rs. D
1,10,000 separately in the assessments of the five members in
respect of the respective notes encashed by them. Two days
later, i.e. on 2nd February, 1955, the Income-tax Officer
issued a notice under section 34(l)(a) of the Income-tax Act,
1922, seeking to include the sum of Rs. 1,10,000 in the hands
• of the family. The Tribunal, being satisfied that the notes E
encashed by the five members belonged to the Hindu undivided
family, had held that the notice issued was valid. On a
reference the High Court held that the notice issued on 2nd
February, 1955 was not valid, since it was found that when the
first assessment was made the primary facts necessary for
·~ reassessment of the family were in the possession of the F
Income-tax Officer; that these facts came into his possession
not by virtue of any disclosure made by the family but were
~discovered by him otherwise; that at the time of the first
( reopening of the assessment of the Hindu undivided family and
of the individual members the question of assessment of the
entire amount represented by the high denomination notes was G
under direct consideration; that it was open to the Income-tax
Officer to assess the whole amount of Rs. 19,000 and Rs.
' .. stage;
1, 10,000 in the hands of the Hindu undivided family at that
and that the escapement, if any, therefore, took place
by reason of the failure of the Income-tax Officer to assess
the family with respect to the sum of Rs. 1,10,000 when he was H
1124 SUPREME COURT REPORTS [1986] 2 S.C.R.
A
in full possession of all the material facts. On appeal, this
Court held affirming the decision of the High Court, that, the ~
primary facts were within the knowledge of the Income-tax
Officer, therefore it could not be said that there was
non-disclosure of any primary facts.
B Reliance was placed, however, on certain observations of
this Court in Income-tax Officer, I-Ward, llundi Circle,
Calcutta, and Others v. Madnani Engineering Works Ltd. , 118
I. T. R. 1 in aid of the submission that whether or not in a~
particular case, allocation of certain expenses was reasonable
or excessive is not a basic fact but an inferential fact. •
c
The question was again viewed by this Court in Ganga
Saran & Sons P. Ltd. v. lncOE-tax Officer and others, 1301
I.T.R. 1 at 13 and the question was whether such remuneration
claimed to have been paid to somebody was bogus and not.
genuine. This Court observed that it was difficult to
D appreciate how any inference could reasonably drawn that the
payment of remuneration to some person was sham and bogus
merely from the manner in which that person expended the
amount of remtineration received by him, particularly when the
persons to whom he gave the loan and made gifts were his close
relatives.
E
it
Our attention was drawn on behalf of the revenue to the
ol::servations of O. Chinnappa Reddy, J. as the learned judge
then was, of the Punjab and Haryana High Court in the case
of Hazi Aal.r Kohd. Mir Aimed v. Coaml.ssioner of IDCOE-tax,
Amritsar, 110 I.T.R. 630 where the learned judge at page 634
F of the report observed referring to the Calcutta Discount ~·
Co.'s case that this Court drew a distinction between primary
facts and inferential facts and held that the duty of the
assessee extended only to disclosing primary facts fully and
truly. The learned judge in Hazi Aal.r Mohd. Mir Almed's case
r
observed that the assessee was not absolved to disclose the
G obligation of the facts truly. So therefore it was an
obligation to disclose truly .all the necessary facts. This
view was reiterated by this Court in Income-tax Officer, I
Ward, Distt. VI, Calcutta and Others v. Laklmani Mewal Das, '
103 I.T.R. 437 where this Court observed that it was the duty t-
of the assessee to disclose fully and truly all primary facts.
H It must further be reiterated that before an action is taken
INDIAN OIL CORPN. v. I. T.O. [SABYASACHI MUKHARJI, J,] 1125
A
under clause (a) of section 147, there llllSt be reason to
i believe that there was failure or omission on the part of the
assessee to disclose fully and truly all primary facts. See in
~ this connection the observations of this Court in the case of
Shea Nath Singh v. Appellate Assistant Go11missioner of
lncoE-tax (central), Calcutta, and others., 82 I. T. R. 147 at B
153. But reason to believe is not the same thing as reason to
suspe.ct.
"! As is well-settled now by the several authorities of
this Court and of several High Courts, that there must be
materials to come to the conclusion that there was 'omission
or failure to disclose fully and truly all material facts c
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 D
will differ from case to case. In every assessment
proceedings, 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. From the primary facts in his possession, whether
.,. on disclosure by the assessee, or discovered by him on the E
basis of the facts disclosed, or otherwise, the assessing
authority has to draw inferences as to certain other facts.
But once the primary facts are there it was for the taxing
authority to draw inferences. It is not necessary for the
assessee to draw inferences for him. See in this connection
"1the observations in Calcutta Discount Co. Ltd. 's case (supra). F
l- 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 G
certain allied companies belonging to Burmah Oil Corporation
. Group. The expenses for these allied concerns were on pro-rata
• basis charged by the London office and a certain proportion of
1' the expenses were allocated to different companies and they
debited certain portions, i.e. these amounts were realised
from the assessee and allied companies in proportion to which H
1126 SUPREME COURT REPORTS [1986] 2 S.C.R.
A
the London company debited them those charges. This fact was
known all along to the revenue while making the original ~
assessment for the relevant assessment years. The audit report
of the assessee company was supplied but it is not clear
whether the audit report of the London company was supplied
and was asked for. It is unlikely that when London company was
B debiting the assessee company and other companies in the audit
repot every year, there would be any note that such debits by
which the London company got certain money which were
excessive i.e. the London company realised more than it had t'
actually incurred of the expenses. In any event, however, the
amount realised would be mentioned in the audit report as a
c basic fact. That has been disclosed, to the revenue at the
time of the original assessment. The nature and the quantum of'Y
the work done had also been disclosed. Whether it was exces- !
sive or not was an inferential fact. It is true that the
Income-tax Officer, from time to time as would be evident from4
the correspondence noted before, had some doubts as to whether
D the entirety of the expenses debited were really incurred for
the assessee company by the London company or whether that was
unreasonable or excessive having regard to the magnitude of
the work done by the London company but that would be a matter
of opinion and an inference drawn from the amount of the work
in correlation to the amount debited. The facts what was done,
E what was being claimed by the London office and the difficul- ~
ties in producing the accounts or the opinion of the auditors
F
for which the Income-Tax Officers had called upon the
assessee, were all known to Income-tax Officers at the time of
making the original assessments. In spite of the same, the
Income-tax Officer choose to assess the assessee in the manner ~
he did. In the light of the opinion of the auditors for the
-
assessment year 1963-64 wherein his opinion that ten per cent
would be reasonable charge might be good information for whichf
the assessment of the assessee could be reopened under clause
(b) but on this basis alone it could not be said that the
assessee had failed to disclose fully and truly all basic
G facts at the time of the original assessment of the relevant
assessment years. There was no evidence or allegation that
such an opinion was there available with the assessee company
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
H was no evidence that such opinion was with the assessee at the
INDIAN OIL CORPN. v. I.T.O. [SABYASACHI MUKHARJI, J.] 1127
A
~ time or before the completion of the original assessments for
~ the relevant assessment years •
.J
J
Having regard to what is stated hereinbefore 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 B
what is reasonable allocation share of the assessee having
regard to the amount of work done on behalf of the assessee
i 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 reasnnableness was there. Secondly, what would be
reasonable or not would be an inference of the auditor. The c
'f amounts spent, the nature of the work alleged to have been
, done by 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 D
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
'1(
for the year 1963-64 it appears that a very large amount of E
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 had been full
disclosure - belief, however, cannot be based on suspicion •
.....
In that view of the matter, in our opinion, the learned F
trial judge was right and the appellate court was in error in
~olding that there were materials from which it could
reasonably be held that the assessee was guilty in not
disclosing the basic facts.
In the aforesaid view of the matter, we are unable to G
sustain the decision of the division bench of the High Court
• under appeal. In the premises these appeals are allowed and
~the order and the judgment of the division bench are set aside
and the order and judgment of the learned single judge are
restored. The assessee is entitled to the costs of these
appeals. H
A.P.J, Appeals allowed.
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