M/S. Mysore Bangle Works v. Commr. Of Income Tax

Jagannatha Shetty, J.:—

These are references under Section 256(1) of the Income-Tax Act, 1961 (the ‘Act’). The questions referred are common and they relate to the validity of reopening the assessment in regard to the income of the assessee-firm falling under Section 40(b) of the Act. It may be sufficient, if we may refer to the questions referred in I.T.R.C No. 175 of 1978. They are:

(1) “Whether, on the facts and in the circumstances of the case, the Tribunal had rightly added back the sum of Rs. 70,990/- to the income of the assessee firm under Section 40(b) of the Act?”

(2) “If the answer to the above question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessment was validly reopened under Section 147(a) of the Income-Tax Act, 1961?”

2. The assessee was a registered firm and was assessed as such for the assessment years 1962-1963, 1963-1964, 1966-1967, 1967-1968, 1968-1969 and 1969-1970. One Tribhuvandas was one of the partners of this firm in all the previous years relevant to the said assessment years. In the intervening two years relevant to the assessment years 1964-1965 and 1965-1966, the business was carried on by Tribhuvandas as sole proprietor with which we are not concerned in these matters.

3. For the assessment years 1962-1963 and 1963-1964, the firm was constituted by an instrument dated November 15, 1960 with three partners including Tribhuvandas. This instrument was silent as to commission payable to Tribhuvandas, but an agreement executed after a couple of days expressly provided for such benefits. In the agreement dated November 17, 1960, the partners agreed that all the goods manufactured by the firm shall be sold through Bitco Sales Service, the proprietory concern of Tribhuvandas and he shall be paid commission at the rate of 10 per cent on the sales effected. It was also stated that the agreement should be supplemental to the instrument of partnership dated November 15, 1960.

4. As mentioned earlier, for the assessment years 1964-1965 and 1965-1966, the business became the proprietory concern of Tribhuvandas. For the subsequent years, he again converted the establishment into a partnership firm executing an instrument dated November 23, 1964. Clause (4) of this instrument provided that all the products manufactured by the assessee firm shall be sold only by Bitco Sales Service, Bangalore, Vijayawada or any other branch of which Tribhuvandas is the sole proprietor and that concern shall be paid a sales commission of 10 per cent. There was a change in the partnership in 1967, but the clause relating to the payment of 10 per cent commission to Bitco Sales Service was, however, continued. In the actual conduct of the business, the 1 assessee issued sale bills in respect of its products in the name of Bitco Sales Service allowing 10 per cent commission but in the trading accounts, the assessee credited only the net amount of the sale proceeds.

5. In the statements filed before the Income-tax Officer for the purpose of original assessments, the trading accounts of the assessee showed only the net sales without indicating the commission paid to Bitco Sales Service. Even the profit and loss account did not disclose the commission or discount allowed to Bitco Sales Service. There was a separate commission account maintained by the assessee, but that also did not show any commission paid to Bitco Sales Service or to Tribhuvandas.

6. In the course of the assessment for the year 1962-1963, the Income-Tax Officer found that the assessee had disclosed a low rate of gross profit as against the profit in the earlier years and he asked the assessee to give reason for that. The assessee in the letter dated March 6, 1963 gave the following reason:

“All the finished goods manufactured by the assessee are being sold to Messrs. Bitco Sales Service, Bangalore and Madras at a discount of 10% and the sales shown in the accounts are after allowing the discount mentioned above. The net result in the trading account is therefore a gross profit of Rs. 1,04,971/- on the net sales of Rs. 4,96,017/- which works out to 16.4% as against 24.6% of the earlier year.”

7. In the original assessments made for the six years mentioned earlier, the I.T.O did not add back the commission paid to Tribhuvandas under Section 40(b) of the Act. During the course of assessment for the year 1970-1971, he found out that the assessee had paid 10 per cent commission to Tribhuvandas in all the earlier years also. As a result, he reopened the assessments for the earlier years under Section 147(a) and in the reopened assessments included the commission paid to Tribhuvandas under Section 40(b) of the Act. The amount so added for the various years are as follows:

“Asst. Year Commission paid “Asst. Year Commission paid 1962-1963 70,990/- 1967-1968 1,29,882/- 1963-1964 83,076/- 1968-1969 1,98,146/- 1966-1967 1,44,469/- 1969-1970 1,91,924/-

8. In the re-assessment proceedings, the assessee contended that the amounts paid to Bitco Sales Service could not be added back under Section 40(b) since there was no payment of commission as such to Tribhuvandas, but only discount was given to him and net sales were shown after deducting the discount at 10 per cent. The I.T.O rejected this plea.

9. The assessee then challenged the re-assessment orders before the Appellate Assistant Commissioner on two grounds: (i) that the reopening of the assessments under Section 147(a) was illegal; and (ii) that the amounts, in any event, could not be added back under Section 40(b) of the Act. Both these grounds were rejected by A.A.C who confirmed all the re-assessments made by the I.T.O

10. The assessee preferred second appeals to the Tribunal repeating the said two-fold contention. In support of the first contention, it was urged that all the primary facts were given at the original assessment stage and, therefore, the provisions of Section 147(a) were not applicable. In support of the second contention, it was urged that since there was no payment of commission as such but only trade discount was allowed to Tribhuvandas, there was no warrant for reopening the assessments.

11. The Tribunal also did not accept these contentions. On the basis of the material on record, the Tribunal came to conclusion that the assessee was allowing commission at 10 per cent of the sales to its partner Tribhuvandas who was the proprietor of Bitco Sales Service and, therefore, Section 40(b) was attracted to such payment.

12. With regard to the applicability of Section 147(a), the Tribunal observed that there was no indication whatever from which the I.T.O could come to a conclusion that any commission has, in fact, been paid to the partner Tribhuvandas which could be disallowed under Section 40(b). The I.T.O was actually misled by the statement of accounts maintained by the assesssee. There then the Tribunal concluded:

“…. …. …. We are, therefore, satisfied that it was because of the failure of the assessee to disclose fully all the information on the basis of which the Income-Tax Officer could have come to the conclusion that Section 40(b) was applicable on the facts of the case that resulted in escapement of income and, therefore, Section 147(a) was clearly applicable.”

13. The first question that falls for decision is whether any commission was paid by the assessee to the partner-Tribhuvandas within the scope of Section 40(b) of the Act. Without deciding this question, it would be difficult to consider the second question as to whether the assessee had placed before the I.T.O truly and fully all the material facts necessary for purpose of assessment.

14. Section 40(b) of the Act provides:

“40. Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”—

(a) ***

(b) in the case of any firm, any payment of interest, salary, bonus commission or remuneration made by the firm to any partner of the firm;”

15. This clause prohibits any allowance in respect of any payment by way of interest, salary, bonus, commission or remuneration made by a firm to any of its partners. The prohibition contained in this Section is absolute and it apparently makes no distinction between the payments by way of interest, commission, remuneration etc., made to a partner as a partner, and such payments made to him although in a different capacity as the proprietor of an independent concern. This Court in N.M Anniah & Co. v. C.I.T, Mysore,1 while taking a similar view has observed that Section 40(b) is absolute in its terms and is applicable to all cases irrespective of the character in which a person has become a partner of a firm.

16. On the first question that arises for consideration, it would be too difficult to accept the contention urged by Sri Sarangan, Learned Counsel for the assessee, that there was no commission as such paid to Tribhuvandas. The agreement dated November 17, 1960 expressly states that the goods manufactured by the assessee-firm shall be sold through Bitco Sales Service by Proprietor Tribhuvandas who shall be paid commission at the rate of 10 per cent on the sales effected. The agreement also states that it shall be read as part of the instrument of partnership executed on November 15, 1960. The instrument of partnership dated November 23, 1964 also provides that all the products manufactured by the assessee-firm shall be sold only by Bitco Sales Service of which first partner Tribhuvandas was the sole proprietor and Bitco Sales Service shall be paid a selling commission of 10 per cent.

17. In view of these clear recitals in the said agreement and also in the instrument of partnership, it would be unreasonable to state that no commission was paid or payable by the firm to Tribhuvandas.

18. The next contention of Mr. Sarangan relates to the arrangement regarding the payment agreed upon between the assessee and the Bitco Sales Service. He urged that all the sales of the products manufactured by the assessee firm were effected through Bitco Sales Service and the latter received the sale consideration and paid back the net price to the assessee-firm. The assessee in its account book also has recorded only such actual receipts. Since the sale proceeds were received by Bitco Sales Service and since the assessee-firm did not pay at the end of the year or periodically, any sum by way of commission to Bitco Sales Service, the payment retained by Bitco Sales Service, according to the Learned Counsel, cannot be regarded as commission paid within the scope of Section 40(b) of the Act. The Counsel also submitted that Bitco Sales Service was also doing business on behalf of other concerns and it was, therefore, not a special feature of the assessee's business to give a trade discount.

19. While appreciating the first part of the contention of Mr. Sarangan, we have to necessarily examine the right of Bitco Sales Service to retain 10 per cent out of the sale proceeds. That right was the right of Tribhuvandas who was the proprietor of Bitco Sales Service. He has acquired that right under the said agreement and by the terms of the partnership in which he was a partner. It is, therefore, not correct to state that 10 per cent commission payable to Tribhuvandas was just a trade discount allowable to any trader. But for the rights conferred on Tribhuvandas under the said agreement between the partners, Bitco Sales Service had no right to retain 10 per cent of the sale proceeds. If there was no such agreement, the assessee-firm would have been entitled to the whole of the sale proceeds.

20. Apart from that, the payment of 10 per cent commission to Bitco Sales Service on all the sales effected cannot also be disputed in view of the despatch memos issued by the assessee-firm. The assessee-firm thereunder did allow 10 percent commission to Bitco Sales Service. It would be, therefore, incorrect to state that Bitco Sales Service was not paid 10 per cent commission. Such a payment cannot cease to be a commission paid to Tribhuvandas merely because Bitco Sales Service was also doing similar business on behalf of other manufacturers as well. The other business of Bitco Sales Service has nothing to do with the question arising in this case. In this view of the matter, it is unnessary to consider the decision of the Madras High Court in C.I.T v. Gemini Productions . 110 ITR 847. relied upon by Mr. Sarangan in support of his contention.

21. The next question to be considered is whether there was full and true disclosure of all primary facts by the assessee in the course of the original assessment. It is now well settled that once all the primary facts are placed before the assessing authority, the assessee's responsibility ceases and the assessing authority's duty begins. In Calcutta Discount Co. Ltd. v. Income-Tax Officer . 41 ITR 191 @ 201., the Supreme Court observed:

“…….. Once all the primary facts are before the Assessing Authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what lega inferences have ultimately to be drawn. It is not for somebody else-far less the assessee - to tell the Assessing Authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences - whether of facts or law - he would draw from the primary facts.

If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the Assessing Authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn?”

22. Mr. Sarangan urged that the assessee in this case has placed the agreement dated November 17, 1960, the partnership deed dated November 23, 1964 and the despatch memos issued by the assessee-firm to Btico Sales Service before the Assessing Authority and if they had been properly perused by him, an inference would be inescapable that Tribhuvandas was entitled to 10 per cent commission.

23. But we do not think that the assessee by just producing those documents could legitimately contend that it had placed all the primary facts. It will be seen that in the statement of accounts filed by the assessee before the I.T.O, no mention was made anywhere about the commission paid to Tribhuvandas or Bitco Sales Service. No entry to that effect has been made in the account books maintained by the assessee. The assessee also did not produce the total trade receipts much less the 10 percent commission account so as to enable the I.T.O to determine the taxable income of the assessee. There was a separate commission account maintained by the assessee, but that also did not show any commission paid to Bitco Sales Service or to Tribhuvandas. Hence the I.T.O was not told that the assessee had paid commission to Tribhuvandas.

24. The case on hand, in our opinion, squarely falls within the ratio of the decision of the Supreme Court in Malegaon Electricity Co., P. Ltd. v. C.I.T Bombay . 78 ITR 466.. It will be useful to advert to the facts in that case. There the assessee company sold its assets to another company and the entire consideration which was much more than the written down value of the assets was paid in cash. In its return for the relevant assessment year 1952-1953, the assessee did not show any profits under Section 10(2)(vii) of the Income-Tax Act, 1922, nor did it show the price received in excess of the written down value of the assets in Part I of Section D of the return. In the course of the original assessment proceedings, the assessee informed the I.T.O about the sale and how the sale price was determined and also brought to his notice the minutes of the Board Meetings of the assessee and of the purchasing-company including the agreement between them. It also submitted a statement of unabsorbed depreciation which set out the depreciation accrued as well as that allowed. After setting off the unabsorbed depreciation, the I.T.O determined the assessee's income to be nil observing: “on going through these documents and the copies of the resolution passed by the share holders of the purchasing-company it is seen that no adjustment is necessary in the matter….” Subsequently, the I.T.O reopened the assessment under Section 34(1)(a) of the I.T Act, 1922 and taxed the profits carped by the assessee under Section 10(2)(vii).

25. The appellate Assistant Commissioner confirmed that order. On further appeal, the Tribunal did not go into the question whether any part of the sale proceeds could be deemed to be profits under Section 10(2)(vii), but held that the assessee had placed before the I.T.O all primary facts for its assessment and the action under Section 34(1)(a) could not be, therefore, sustained. On a reference, the High Court of Bombay answered the question related to the validity of reopening of the assessment in favour of the Revenue.

26. In the appeal against the decision of the Bombay High Court, the Supreme Court observed:

“In our judgment the Tribunal erred in declining to decide the question whether any portion of the sale price came within the scope of Section 10(2)(vii). That question should have been examined at the very outset for the purpose of considering whether the assessee had placed before the Income-Tax Officer truly and fully all material facts necessary for the purpose of its assessment. If it is found that any portion of that sale price are profits then in our opinion the High Court was right in holding that the assessee had failed to place before the Income-tax Officer during the original assessment truly and fully all material facts necessary for the purpose of assessment. Admittedly, the price realised at the sale in excess of the written down value of the assets sold, had not been included as profits in the return submitted by the assessee. It had also not shown the same in Section D of Part I of the return …………”

It was further observed:

“It may also be noted that the assessee had not shown either in its return or in any of the documents submitted to the Income-Tax Officer the written down value of the assets sold. Hence, not only the Income-Tax Officer was not told that the assessee had earned any profit under Section 10(2)(vii) nor even the essential fact, viz., the written down, value of the assets sold was supplied to him so as to enable him to find out the price in excess of the written down value realised by the assessee. It is true that if the Income-Tax Officer had made some investigation, particularly if he had looked into the previous assessment records, he would have been able to find out what the written down value of the assets sold was and consequently he would have been able to find out the price in excess of their written down value realised by the assessee. It can be said that the Income-Tax Officer if he had been diligent could have got all the necessary information from his records. But that is not the same thing as saying that the assessee had placed before the Income-Tax Officer truly and fully all material facts necessary for the purpose of assessment.”

27. The facts in the present case are not different. They lie in close parallel with the facts found by the Supreme Court in Malegaon Electricity Co. case. Therefore, in the light of the principles enunciated by the Supreme Court in that case and having regard to the facts found in this case, it seems to us that the assessee herein has failed to disclose fully and truly all material facts necessary for the purpose of assessment.

28. There is, however, one redeeming feature in regard to the assessment for the year 1962-1963. In the course of assessment for the year 1962-1963, the I.T.O specifically asked the assessee to give reason for the low rate of profit. The assessee in its reply dated March 6, 1963, gave the reasons as follows:

“All the finished goods manufactured by the assessee are being sold to Messrs. Bitco Sales Service, Bangalore and Madras at a discount of 10% and the sales shown in the accounts are after allowing the discount mentioned above. The net result in the trading account is therefore a gross profit of Rs. 1,04,971/- on the net sales of Rs. 4,96,017/- which works out to 16.4% as against 24.6% of the earlier year.”

29. The I.T.O himself got these necessary material Facts as to the payment of 10 per cent commission to Bitco Sales Service. If he had been little more diligent, he could have ascertained and computed the total amount of commission paid by the assessee to Bitco Sales Service. We cannot, therefore, hold that the assessee for the assessment year 1962-1963 had failed to disclose fully and truly all the material facts necessary for the purpose of assessment. The reassessment for the year 1962-1963 cannot, therefore, be sustained.

30. In the result, we answer the first question in the affirmative and against the assessee. We also answer the second question in the affirmative and against the assessee in all references except in I.T.R.C No. 175 of 1978.

31. In I.T.R.C No. 175 of 1978, for the assessment year 1962-1963, we answer the second question in the negative and in favour of the assessee.