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Union Carbide (India) Ltd. v. Income-Tax Officer

Calcutta High Court

Apr 30, 1971

Judgment

Subsequent
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Comprehensive Summary of the Legal Opinion

Factual and Procedural Background

The petitioner, a manufacturing company producing electric dry batteries and related products, operated through internal divisions: "National Carbon Company" ("Natco") which manufactured batteries, and a separate division "Metals and Ores Company" ("Metco") which produced zinc strips used largely by Natco for internal incorporation into batteries and, to a smaller extent, sold to outside parties. Metco imported zinc spelter, processed it and supplied most of its output to Natco.

The petitioner claimed tax relief under Section 15C of the Indian Income-tax Act, 1922, in relation to Metco's profits for certain assessment years; relief was allowed by the income-tax authorities for some years (including assessment year 1958-59). For assessment year 1962-63 no Section 15C relief had been claimed or granted and the revenue declined to proceed with that notice.

On 20 March 1967 notices under Section 148 of the Income-tax Act, 1961 were issued to the petitioner in respect of assessment years 1958-59 and 1962-63 (signed by S. K. Roy). A further notice dated 26 March 1968 was issued for assessment year 1959-60 (by P. R. Rao). The notices asserted that the petitioner had been wrongly granted Section 15C relief because a portion of Metco's profits arose from inter-departmental transactions (sales to Natco) and thus were not properly eligible for the relief.

The petitioner challenged the notices by filing an application under Article 226 of the Constitution, contending that all material facts had been disclosed at the time of the original assessments and there was no omission or failure justifying issuance of notices under Section 148.

Legal Issues Presented

Whether the notices under Section 148 (issued invoking Section 147 principles) were validly issued—specifically, whether the Income-tax Officer held the requisite belief that income had escaped assessment due to omission or failure by the assessee to disclose fully and truly all material facts.
Whether there were materials or reasons before the Income-tax Officer justifying the formation of such a belief (i.e., whether the statutory conditions for reopening assessment under Section 147/148 were satisfied).
Whether the material produced before the Income-tax Officer (including profit and loss accounts and annual reports) amounted to disclosure that would defeat an assumption of omission sufficient to permit issuance of notices under Section 148.

Arguments of the Parties

Petitioner's Arguments

The petitioner contended that at the time of the original assessments it had placed all material particulars before the Income-tax Officer, including profit and loss accounts and balance-sheets. There was, therefore, no omission or failure to disclose material facts that could justify the issue of notices under Section 148.
The petitioner relied on the documentation filed during original assessments (annual reports and profit and loss accounts) showing amounts for internal utilization of Metco's products, arguing that these demonstrated disclosure of inter-departmental transactions.

Respondents' Arguments

The affidavit of Income-tax Officer P. R. Rao stated that Metco's profit and loss account showed a gross "by sales" figure but did not separately disclose whether the entire sales were to outside customers; the petitioner had not furnished the figures separately and had not shown profits from inter-departmental transactions separately.
The respondents relied on a direction from the Central Board of Direct Taxes (referring to the case of Messrs. Hindusthan Motors Ltd.) establishing that a unit set up for manufacture for self-consumption may not qualify for Section 15C relief; this required re-examination of the petitioner's case and justified assuming jurisdiction under Section 147.
The respondents asserted that there had been an omission or failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment, and therefore there were reasons to believe that income chargeable to tax had escaped assessment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Calcutta Discount Company Ltd. v. Income-tax Officer	General support for settled propositions concerning the conditions and limitations for issuing notices under Section 147/148.	The court cited this decision among other authorities to show that the law on reopening assessments is well-settled and to support the listed propositions (1)–(6) regarding belief, materials and judicial review.
Narayanappa v. Commissioner of Income-tax	Authority for principles governing reopening assessments under Section 147/148.	Grouped with other cases to establish settled principles about formation of belief and availability of materials for reopening assessments.
Commissioner of Income-tax v. Bhanji Lavji	Support for the legal propositions on issuing notices under Section 147/148.	Relied on as part of the body of decisions confirming legal requirements for issuance of s148 notices (belief + material).
Kantamani Venkatanarayana and Sons v. First Additional Income-tax Officer, Rajahmundry	Support for the settled law on Section 147/148 and the court's role in reviewing such notices.	Placed in the group of authorities cited to show that courts should examine whether materials existed for forming the requisite belief, though not to probe sufficiency of reasons.
Sowdagar Ahmed Khan v. Income-tax Officer, Nellore	Support for the legal framework governing reopening of assessments and Section 148 notices.	Used to evidence that the stated propositions of law are well settled by precedent.
Commissioner of Income Tax, Calcutta v. Burlop Dealers Ltd.	Support for principles regarding Section 147/148 notices and judicial review of the materials and belief.	Cited as part of the consistent line of authority confirming the stated principles for issuance of notices under Section 148.
Chhugamal Rajpal v. S. P. Chaliha	Express proposition: the officer issuing a notice under Section 148 must give reasons and have some prima facie grounds for taking action under Section 148.	The court quoted this decision directly to emphasize that a notice under Section 148 requires prima facie grounds and reasons for issuance, applying that standard when assessing whether the respondents had formed the requisite belief.
Messrs. Hindusthan Motors Ltd. (Central Board of Direct Taxes direction)	Administrative direction that an industrial unit set up for manufacture for self-consumption cannot qualify for Section 15C benefit; only activities generating direct income independently qualify.	The respondents relied on this direction as the reason prompting re-examination; the court treated it as evidence of a change in administrative view but found that reliance on an altered view of law did not equate to a formed belief of omission at the time of original assessment.

Court's Reasoning and Analysis

The court undertook a step-by-step analysis grounded in the statutory scheme and the authorities. It first set out the legal conditions necessary for issuing notices under Section 148 (invoking Section 147 principles). These conditions, as summarized by the court, included:

The Income-tax Officer must hold a belief that income has escaped assessment because of omission or failure by the assessee to disclose fully and truly all material facts.
There must be materials or reasons for forming that belief.
The existence of the belief and of materials can be challenged in court; if challenged, the revenue must satisfy the court that the officer held such belief and that there were reasons to do so.
Where reasons or materials exist, the court will not investigate the sufficiency of those reasons; it confines review to whether there were materials for belief.
Production of books of account or other evidence before the Income-tax Officer does not by itself absolve the assessee from disclosing material particulars.
Whether there were materials or whether the officer formed the belief must be judged from the affidavit of the issuing officer or from departmental records if produced.

The court then examined the factual record and affidavits produced. Key factual points noted by the court included:

Annual reports and profit and loss accounts for the relevant years included express statements indicating the value of zinc processed by Metco that was utilized internally (e.g., shown as part of total sales with parenthetical notation of the internal utilization amounts).
Copies of Metco's profit and loss accounts were filed along with the company's returns for Section 15C relief for relevant years.
There was no affidavit from S. K. Roy (the officer who signed the 1958-59 notice). The only affidavit from the department was by P. R. Rao, who issued the 1959-60 notice.

On the affidavit evidence, the court observed that Shri P. R. Rao did not state that he personally held the requisite belief; his statements were verified "to be true to information based on records." The affidavit asserted that the profit and loss accounts did not show inter-departmental sales separately and that the Central Board's direction required re-examination. The court concluded that what the record revealed was a desire to re-examine the assessments in light of an altered administrative or legal view (reflected in the Central Board direction concerning Hindusthan Motors Ltd.), rather than evidence that the Income-tax Officer had formed the belief at the relevant time that the assessee had omitted to disclose material facts.

The court emphasized that an intention to re-open for reconsideration prompted by a change in view of law or administrative approach is not equivalent to the officer having formed a bona fide belief of omission at the time of issuing the notice. Having examined the records and affidavit, the court found that the conditions precedent for issuance of the Section 148 notices—namely the officer's belief and the presence of materials for such belief—were not satisfied on the material before the court.

Holding and Implications

Holding: The court made the rule absolute and ordered relief in favour of the petitioner. Specifically:

DISPOSED OF: There will be a writ in the nature of mandamus directing the respondents to recall, cancel and withdraw the notices under Section 148 of the Income-tax Act mentioned in the petition.
There will also be a writ in the nature of prohibition directing the respondents to forbear from giving effect to the said notices.
If the respondents had passed assessment orders pursuant to those notices, such orders are quashed and a writ of certiorari was directed to issue accordingly.
There will be no order as to costs.
The operation of the order was stayed for eight weeks from the date of the judgment; during the stay, all interim orders remain in force. (During the pendency leave had been given to respondents to complete assessments pursuant to the notices; those completed assessments are not to be given effect to and are quashed.)

Implications: The direct consequence of the decision is that the particular Section 148 notices (and any consequent assessment orders made pursuant to them) were set aside in respect of the matters challenged. The court treated the departmental reliance on a changed administrative view (Central Board direction) as insufficient, on the material produced, to show that the officer had formed the requisite belief of omission at the time of issuing the notices. The opinion does not articulate any broader or novel precedent beyond applying well-settled principles (as supported by the cited authorities) to the facts of this case; the decision's practical effect is confined to recalling and prohibiting the respondents from acting on the specific notices and quashing assessments made pursuant thereto.

Note: This summary is strictly confined to the facts, arguments, cited authorities, reasoning and orders contained in the provided opinion. No information beyond the opinion has been introduced.

Show all summary ...

1. In this application under Article 226 of the Constitution the petitioner challenges notices under Section 148 of the Income-tax Act, 1961, issued in respect of assessment years 1958-59, 1959-60 and 1962-63. The said notices were issued on the ground that the petitioner-company had enjoyed benefits under Section 15C of the Indian Income-tax Act, 1922, which the petitioner was not entitled to in the relevant assessment years. It would be necessary to advert to the facts in detail later on. For the assessment year 1962-63 it has been stated by the petitioner that no relief under Section 15C had been claimed or granted. Therefore, there cannot be any question of reopening of the assessment for the said assessment year on the aforesaid ground. The fact that in respect of the assessment year 1962-63 no relief under Section 15C had been granted has been accepted by the learned counsel for the revenue. Learned counsel has further stated that the revenue did not wish to proceed with the said notice under Section 148 of the Income-tax Act, 1961, for the assessment year 1962-63. It is, therefore, not necessary to consider the question of the assessment year 1962-63. The petitioner is a manufacturing company engaged in the manufacture and sale of electric dry batteries, chemicals and plastics and carbon products. The manufacture of electric dry batteries in India is undertaken by a division or department of the petitioner-company known as National Carbon Company, shortly called " Natco ". Zinc strips are incorporated in dry batteries and these strips not only form the metal casings of batteries but function as the negative electrodes of batteries. The said zinc strips which are incorporated into dry batteries manufactured by Natco are integral parts of the dry batteries sold by the petitioner. The petitioner set up a new and separate division or department for the production of zinc strips. The new manufacturing division is known as " Metals and Ores Company ", shortly called " Metco ". For this the petitioner erected a factory at Alipur which went into production in 1956. For manufacturing zinc strips, zinc spelter, which constitutes the basic raw materials for these strips, is imported by the petitioner from abroad. Zinc spelter so imported is first processed by Metco by including certain additives and the processed material is then rolled into zinc sheets and cut by Metco into shapes and sizes suitable for incorporation into the batteries manufactured by " Natco". The bulk of Metco's production is passed on to "Natco" for incorporation into the dry batteries that are manufactured and sold by the petitioner. Metco also sells processed zinc strips to other manufacturers of dry batteries as zinc strips have other commercial applications. These strips are sold to the third parties engaged in the production of addressograph plates and lithographic plates. Such sale, however, of Metco's production to third parties constituted a small proportion of Metco's production. The larger portion of Metco's production was utilised by " Natco ". The petitioner claimed in the relevant assessment year that Metco was an industrial undertaking which qualified for tax relief under Section 15C of the Indian Income-tax Act, 1922. The petitioner accordingly claimed relief under Section 15C of the Act in respect of the profits earned by "Metco" relative to the four assessment years, 1958-59 and 1961-62, and such relief was allowed by the income-tax authorities. As mentioned hereinbefore for the assessment year 1962-63 no relief had been claimed under Section 84 of the Income-tax Act, 1961, corresponding to Section 15G of the Indian Income-tax Act, 1922, in respect of the profits earned by Metco and as such no relief was granted. As mentioned hereinbefore the revenue has stated that it would not proceed with the said notice in respect of the said assessment year. It is the case of the petitioner that on a due consideration of all the relevant materials and evidence the Income-tax Officer was satisfied about the claim, of the petitioner in respect of the profits earned from " Metco " and allowed relief in respect of the said four years, being assessment years 1958-59 and 1961-62 under Section 15C of the Income-tax Act, 1922.

2. On the 20th March, 1967, the petitioner received two notices dated 20th March, 1967, signed by Shri S. K. Roy, the then Income-tax Officer, issued under Section 148 of the Income-tax Act, 1961, in respect of the assessment years 1958-59 and 1962-63. It appears from the said notices that the notice for the assessment year 1958-59 was issued after obtaining the-necessary satisfaction of the Commissioner of Income-tax, West Bengal III. Thereafter, the petitioner received another notice dated 26th March, 1968, in respect of the assessment year 1959-60 issued by the Income-tax Officer, Shri P. R. Rao. From the correspondence preceding the issuance of the said notices and subsequent thereto, and the affidavit-in-opposition it appears that the notice was issued on the ground that the petitioner had been wrongly granted relief under Section 15C of the Indian Income-tax Act on the sales made by " Metco " to " Natco " or in other words in respect of inter-departmental transactions. Upon the receipt of the said notices the petitioner moved this court under Article 226 of the Constitution challenging the issue of the said notices on the ground that there were no materials for the Income-tax Officer to issue the said notices and all the necessary particulars and primary facts were fully disclosed at the time of the original assessments and there had been no omission or failure on the part of the petitioner to disclose the primary and relevant facts.

3. The petitioner obtained a rule nisi. The affidavit-in-opposition on behalf of the respondents was filed by one P. R. Rao, the Income-tax Officer, which was affirmed on 5th of June, 1969. It would be necessary to set out the relevant portion of the said affidavit. In paragraph 5 of the said affidavit the said deponent states :

"With reference to paragraph 9 of the petition I say that the profit and loss account relating to Metco filed along with the return for the year ended 25th December, 1958, shows the credit of Rs. 40,49,866 against the narration " by sales ". The profit and loss account does not show whether the entire sales represent sales to outside customers or not. The petitioner failed to disclose the figures separately. Similarly, the profit and loss account relating to Metco for the year 1958-59 does not show any profit arising out of inter-departmental transactions separately."

4. He further goes on to say :

" I say that this aspect of the matter, namely, whether profits said to be arising out of inter-departmental transactions qualify for relief under section 15c of the old act was not considered at the time of assessment at all."

5. In paragraph 7 of the affidavit, he states :

" I say that the Central Board of Direct Taxes has given direction in the case of Messrs. Hindusthan Motors Ltd. (under reference of their letter No. 15/1/63-IT (A.I.) dated 2nd February, 1963) to the effect that an industrial unit set up for the manufacture of certain components for self-consumption cannot qualify for Section 15C benefit as an industrial undertaking. It is only such industrial undertaking whose activities independently result in direct incomes to the assessee which will be eligible for consideration of the benefit contemplated under Section 15C in respect of such income. In view of the said decision of the Central Board of Direct Taxes it becomes necessary to re-examine the case of the petitioner and as such jurisdiction was assumed under section 147 of the new act so that the entire question could be gone into upon proper materials and evidence."

6. Again in paragraph 19 of the affidavit he states :

" In this connection I say that the petitioner failed to disclose at the time of the original assessment the fact that a portion of the profits said to have been earned by Metco was as a result of inter-departmental transaction and further failed to disclose material particulars showing what was the amount of profits arising out of sales to outside parties. As such the Income-tax Officer has reason to believe and bona fide believed that by reason of the omission and failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment the said year's income chargeable to taxes had escaped assessment."

7. There is no affidavit by Shri S. K. Roy as mentioned hereinbefore. In the records of the Income-tax Officer produced before me, it has been recorded as follows :

"The company has been allowed Section 15C relief for the assessment year 1958-59 and onwards on the profits of the unit known as metals and ores division. It, however, transpires that many a portion of the products manufactured in this unit have been consumed by the assessee-company itself in the unit known as National Carbon Co. It is provided that such relief under Section 15C which has been allowed is not profit earned by resale to outside customers, but represents the book adjustment only. The relief under Section 15C is not admissible in respect of so much of the profits as have been earned by the company by way of particular book adjustment. Under Section 147 action, therefore, has to be taken to withdraw the relief already given to the assessee-company on the ground that the company has not at the time of the original assessment disclosed all material particulars. In fact, it was never known that the profits in the metals and ores division represent the book adjustment."

8. It is the case of the petitioner that at the time of the original assessment all material particulars had been placed before the Income-tax Officer. It was contended by counsel for the petitioner that this fact had not been controverted in the affidavit of the Income-tax Officer who had made the original assessment. It has, however, to be noted that the person or persons who had appeared on behalf of the petitioner-company at the time of the original assessment before the Income-tax Officer have also not made affidavits in this proceeding supporting the assertions made by the petitioner. Therefore, the absence of any affidavit by the Income-tax Officer who made the original assessment will not, in my opinion, affect the position. The matter might have been different if there was an affidavit by a person who could have verified to his personal knowledge about the facts which took place at the time of the original assessment. That is not the position here. It is further the case of the petitioner that at the time of the original assessment the relevant balance-sheets were filed by the petitioner-company as part of the return. It is statutorily required to be so filed under the provisions of law.

9. My attention was drawn to the annual report and the balance-sheet for the year 1957 which is relevant for the assessment year 1958-59. In the said annual report of the directors it has been stated as follows :

" The sales of your company's products in 1957 totalled Rs. 5,35,34,597 as compared to Rs. 5,18,94,061 in 1956. Total sales include Rs. 43,71,970, being the value of zinc processed by Metals & Ores Company for internal use by other division of your company."

10. In page 13 of the said balance-sheet of the profit and loss account it has been stated:

By sales (including Rs. 43,71,970 being the cost of items utilized internally) ... ... Rs. 5,35,34,597.

11. Similarly in the annual report of the directors for the year 1958 it has been stated as follows :

"Total sales of the company's products were about Rs. 6,05,06,971 in 1958 as compared to Rs. 5,35,34,597 in 1957. Of these total sales, Rs. 39,44,301 represents the vatue of zinc processed by Metals & Ores Company for internal use of other division of your company."

12. In the profit and loss account for the said year there is also a statement like this :

"By sales (including Rs. 39,44,301 being the cost of items utilized internally)" ... ... Rs. 6,05,06,971."

13. It is also the common case that along with the profit and loss account of the company a copy of the profit and loss account of the Metals & Ores Company was filed for the purpose of Section 15C relief for the two relevant assessment years. Now, in this copy for the year 1957, relevant assessment year 1958-59, it has been stated as follows :

15. It is upon these facts that the question, whether there were any materials for the Income-tax Officer to hold the belief that there was omission or failure on the part of the assessee to disclose fully and truly all material facts relevant for the assessment or relevant in this case for obtaining relief under Section 15C of the Income-tax Act, 1922, has to be judged.

16. The conditions and limitations upon which notices under Section 148 of the Income-tax Act, 1961, can be issued have been on several occasions considered by the Supreme Court. It is not necessary to refer in detail to the said decisions. From the said authorities and the section it is clear that in order to be entitled to issue a notice under Section 147(a) of the Income-tax Act, 1961, the following conditions have to be fulfilled:

(1) The Income-tax Officer, issuing the notice, must hold the belief that due to the omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for the assessment or to make the return, the income has escaped assessment.

(2) There must be materials or reasons for the formation of the aforesaid belief.

(3) Existence of the belief and existence of the materials for forming the belief, both can be challenged in proper proceedings and if a challenge is thrown, it is for the income-tax authorities to satisfy the court that the Income-tax Officer held the belief and that there were reasons to hold such belief.

(4) But if there are reasons or materials the sufficiency of such reasons or materials is not a matter to be investigated by court.

(5) Production of books of account or other evidence before the Income-tax Officer does not absolve the assessee from the obligation to disclose fully and truly all material particulars relevant for the assessment.

(6) Whether there were materials before the Income-tax Officer or whether he formed the belief or not must be judged by the court either from the affidavit by the Income-tax Officer issuing the notice or from the records of the department, if produced before the court.

17. It is upon conditions and within the time prescribed by subsequent section of the Act and after obtaining sanction as mentioned in the Act that notice under Section 148 ot the Income-tax Act, 1961, can be served.

18. The above propositions of law, in my opinion, are now well-settled by the several judicial decisions. Reference may be made to Calcutta Discount Company Ltd. v. Income-tax Officer, , Narayanappa v. Commissioner of Income-tax, , Commissioner of Income-tax v. Bhanji Lavji, [1971] 79 I.T.R. 582 (S.C.), Kantamani Venkatanarayana and Sons v. First Additional Income-tax Officer, Rajahmundry, [1967] 63 I.T.R. 638; [1967] 1 S.C.R. 984 (S.C.), Sowdagar Ahmed Khan v. Income-tax Officer, Nellore, [1968] 70 I.T.R. 79(S.C.) and Commissioner Of Income Tax, Calcutta v. Burlop Dealers Ltd.† ., [1971] 79 I.T.R. 609 (S.C.) In the case of Chhugamal Rajpal v. S. P. Chaliha, [1971] 79 I.T.R. 603 (S.C.) the Supreme Court observed after setting out the facts at page 607 of the report :

" What that provision requires is that he must give reasons for issuing a notice under Section 148. In other words, he must have some prima facie grounds before him for taking action under section 148.

20. The next aspect of the matter is, as mentioned hereinbefore, there is no affidavit by Sri S. K, Roy who had issued the notice for the assessment year 1958-59. There is the affidavit of Mr. P. R. Rao from which I have quoted in extenso. Reading the affidavit it does not appear that he has said that he held the belief. Paragraph 19 where he has made the statement about Income-tax Officer holding the belief has been verified to be true to information based on records. He has also not said that from the materials either he or Sri Roy came to the conclusion that the petitioner-company had failed to disclose truly and fully all primary facts. The affidavit of Sri Rao and the records of the case reveal that more or less as a result of the directions of the Central Board of Direct Taxes it was thought necessary that there should be a re-examination of the position in case of the petitioner. It is really trying to judge the position retrospectively in view of certain altered notions of law. A desire to re-examine facts from an altered notion of law is not the same thing as to come to the con-elusion that there was failure or omission on the part of the petitioner to disclose fully and truly all primary facts at the time of the original assessments. From the records it appears to me, therefore, that the conditions precedent for the issue of the notice have not been fulfilled. Counsel for the petitioner contended that Sri S. K. Roy had not made the affidavit; but the records have been produced and the records of the case do not improve the position of the revenue from this point of view.

21. In the aforesaid view of the matter this application must succeed and the rule is made absolute. There will be a writ in the nature of mandamus directing the respondents to recall, cancel and withdraw the notices under Section 148 of the Income-tax Act mentioned in the petition and there will also be a writ in the nature of prohibition directing the respondents to forbear from giving effect to the said notices. There will be no order as to costs. There will be a stay of operation of this order for eight weeks from date and during the continuance of stay all interim orders will continue. During the pendency of the rule leave was given to the respondents to complete the assessment pursuant to the notices mentioned before. If the respondents have passed orders of assessment, the same also are not to be given effect to and they are quashed accordingly and let a writ of certiorari issue accordingly.