Imperial Chemical Industries Ltd. v. Income-Tax Officer, Calcutta High Court, Judgment, Law, casemine.com

Precedent	Rule or Principle Cited For	Application by the Court
I.C.I (India) Private Ltd. v. Commissioner of Income-tax, [1972] 83 ITR 710 (SC)	Affirmed Tribunal's findings on primary facts (that transfers were pursuant to loan/arrangement) and that section 52 did not apply.	Court relied on the Tribunal and Supreme Court findings to conclude that the basic factual nature of the transaction had been conclusively determined (transfer in repayment of loans) and therefore undermined the revenue's basis for reopening assessment against the London company.
Union of India v. Rai Singh Deb Singh Bist, [1973] 88 ITR 200 (SC)	Cited in support of inferences regarding possession/availability of records to the revenue.	Court invoked it to support the conclusion that the respondents had the memorandum and articles in their records since 1961 (i.e., the documents were obtainable by the revenue).
Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax, [1955] 27 ITR 49 (SC)	Memorandum/object clauses do not determine whether a receipt is revenue or capital; the nature of the transaction decides the character of receipts.	Court used this authority to hold that the memorandum is irrelevant to the question of whether an amount is income of the company; thus the revenue could not rely simply on an object clause to treat receipts as business profits.
Commissioner Of Income-Tax, Calcutta v. J.K Eastern Industries (Private) Limited, [1965] 55 ITR 376 (Cal)	Supportive authority about construction and effect of memorandum clauses in determining character of receipts.	Cited as consistent authority for the proposition that memorandum clauses do not determine revenue/capital character; used to support the appellant's position on the irrelevance of memorandum clauses to the tax characterisation.
Commissioner Of Income Tax, Calcutta v. Burlop Dealers Ltd., [1971] 79 ITR 609 (SC)	Once primary facts are disclosed, the assessee need not indicate legal inferences; Explanation 2 does not impose an onerous additional duty on assessee beyond disclosure of primary facts.	Court relied on the principle to conclude that production of primary documents and facts by the appellant relieved it of the obligation to indicate the inferences that the Income-tax Officer might draw; this undercut the revenue's reliance on Explanation 2 to justify reopening.
S. Narayanappa v. Commissioner of Income-tax, [1967] 63 ITR 219 (SC)	“Reason to believe” requires belief held in good faith based on reasons.	Court invoked the authority to emphasise that an assessing officer's belief must be genuine and founded on material; a pretence or mere pretended belief is not sufficient to confer jurisdiction to reopen.
Commissioner of Income-tax v. Gillanders Arbuthnot & Co., [1973] 87 ITR 407 (SC)	Two conditions for reassessment jurisdiction: (1) reason to believe income under-assessed; and (2) reason to believe such under-assessment occurred by omission to make return or omission to disclose fully and truly all material facts.	Court used this as the governing legal test for the validity of the section 148/147 notice and examined whether the assessing officer had material to form a bona fide belief satisfying both conditions.
Commissioner Of Income Tax, Kerala v. R.R. Ramakrishna Pillai, [1967] 66 ITR 725 (SC)	Distinction between exchange and sale; the true nature of the transaction is determined by the agreement between parties rather than mere form or shown values.	Court cited to support the proposition that the contractual terms and true nature of transactions (sale vs exchange, agreed price) govern tax treatment rather than market-price comparisons.
Calcutta Discount Co. Ltd. v. Income-tax Officer / Commissioner of Income-tax v. Calcutta Discount Co. Ltd., [1961] 41 ITR 191; [1973] 91 ITR 8; (1974) 3 SCC 260	Transactions between parent and subsidiary can be bona fide; in absence of material showing sham or secret profit, income cannot be fictionalised by the revenue. Taxpayers may arrange affairs lawfully to reduce tax liability.	Court relied heavily on these principles to conclude that transfers carried out under the arrangement were bona fide and lawful tax planning does not make a transaction vulnerable to fictional additions by the revenue.
Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax, [1955] 28 ITR 952 (Mad)	Authority (cited in Calcutta Discount) that concessional intra-group sales alone do not justify treating difference as profits without evidence of sham or non-bona fides.	Applied indirectly through the Calcutta Discount authority to reinforce that absence of evidence of sham transactions precludes fictional assessment.
Commissioner Of Income Tax, Gujarat v. A. Raman & C., [1968] 67 ITR 11 (SC)	Tax avoidance by lawful arrangement of affairs is not impermissible; legality of arranging affairs to distribute charge of tax.	Cited (via Calcutta Discount) to support that lawful tax planning does not justify reassessment absent material showing impropriety.
Sharkey (Inspector of Taxes) v. Wernher, [1956] 29 ITR 962 (HL)	Case distinguished in Calcutta Discount (i.e., circumstances where different treatment was warranted).	Court noted the distinction of Sharkey v. Wernher from facts of the present case and relied on the reasoning in Calcutta Discount to differentiate the authorities.
Dooar's Tea Co. Ltd. v. Commissioner of Agricultural Income-tax, [1962] 44 ITR 6 (SC)	Distinguished in Calcutta Discount; used to explain limits of applying certain anti-avoidance reasoning.	Court relied on the distinction to show that the present facts did not warrant treatment as in Dooar's Tea.
Cotman v. Brougham, [1918] AC 514 (HL)	Classic statements on purpose and scope of a company's memorandum — protections to subscribers and third parties; principles of construction of object clauses.	Cited to explain general principles of how memorandum/object clauses are construed and their limited role in determining the nature of a transaction for tax purposes.
Introductions Ltd. v. National Provincial Bank Ltd., [1969] 1 All ER 887; [1968] 2 All ER 1221; [1969] 39 Comp Cas 919 (CA)	On construction of memorandum clauses containing many objects stated to be independent — borrowing power must operate for purposes of company, and one cannot convert a mere power into an independent object by formulaic wording.	Court applied these construction principles to the appellant's multifarious object clauses and concluded that financing powers were ancillary to the main industrial/manufacturing objects and not an independent licence to carry on banking/financing as a distinct business.
Chittoor Motor Transport Co. (P.) Ltd. v. Income-tax Officer, [1966] 59 ITR 238 (SC)	Authority on determining true nature of transaction irrespective of stated values; cited in context of transaction characterization.	Invoked in support of precedents stressing that the true nature of transactions governs tax treatment rather than superficial valuation differences.
Commissioner of Wealth Tax, Madras v. Spencer & Co. Ltd., (1973) 4 SCC 204; [1973] 88 ITR 429	Companies are separate legal entities; a liability remains a debt irrespective of the mode of discharge; the mode of discharging a liability does not change its true character.	Court cited the Spencer authorities to support that transfers in satisfaction of debts/arrangements do not change the fundamental character of the liabilities or convert them into fictional profits for the transferor.

The Judgment of the Court was delivered by

Salil K. Roy Chowdhury, J.:— The short question involved in this appeal is whether the Income-tax Officer had jurisdiction to issue the notice dated the 20th May, 1970, under section 148 of the Income-tax Act, 1961, for the assessment year 1962-63 and also notices dated 7th July, 1970, under section 142(1) and-section 143(2) of the said Act to the appellant. The said notices relate to an alleged escapement of income of the appellant (hereinafter also referred to as the “London company”) by not disclosing its memorandum and articles of association and the world balance-sheet for the said assessment year. The income alleged to have escaped assessment is the profit alleged to have been earned by financing or money-lending transaction with I.C.I (India) and repayment of the loan by transfer of shares in the Alkali & Chemical Corporation of India Ltd., Indian Explosives Ltd. and Atic Industries Private Ltd., which are associated companies in India of the London company. It is alleged that the difference between the face value of the said shares and the market value of the date of transfer by the I.C.I (India) Ltd. to the London company is to the tune of Rs. 14 crores which is alleged to be the profit escaping assessment by alleged omission on the part of the London company to disclose its memorandum, articles and world balance-sheet.

2. The present appeal is one of the off-shoots of the various proceedings initiated by the income-tax authorities against the London company and its subsidiary, I.C.I (India) Ltd.

3. The basic primary facts which are relevant for the purpose of this appeal are either admitted or, in any event, finally concluded by the decisions of the Income-tax Appellate Tribunal and the Supreme Court in a reference matter under section 52 of the Income-tax Act, 1961 [I.C.I (India) Private Ltd. v. Commissioner of Income-tax, [1972] 83 ITR 710 (SC)]. The London company, viz., the appellant, is one of the world's largest chemical manufacturing companies and in India it has promoted the Indian Alkali & Chemical Corporation Ltd. The scheme of investing substantial fund of the London company in India for setting up various manufacturing units of chemical products was conceived after the last world war and finally it decided to finance foreign exchange requirements for the new projects by advancing sterling loans to its hundred per cent, subsidiary, I.C.I (India) Ltd. For that purpose it appears that prolonged negotiations started between the representatives of the London company and the Government of India and finally a declaration of intention was recorded between the Government of India on the first part, the London company on the second part and subsidiary, I.C.I (India) Ltd. on the third part. That document seems to be the charter under which the whole scheme of the transactions which has given rise to various proceedings by the income-tax department against the London company and its Indian subsidiary. The declaration has clearly, conclusively and in specific terms set out the intention, machinery and arrangements by which the investment of the London company for purchase of new shares in the three Indian companies which will hereafter be described as A.C.C.I, I.E.L and Atic have been laid down. It is unnecessary to set out the said declaration of intention dated the 5th of November, 1953, as that has been the subject-matter of the previous Income-tax Act proceeding which ended in the Supreme Court (I.C.I (India) Private Ltd. v. Commissioner of Income-tax, [1972] 83 ITR 710) and also in the present proceeding. The said document is at pages 49-68 of the paper book. Only the portions relevant for the purpose of this appeal are hereunder set out:

“I.C.I refers to the London company and I.C.I (India) refers to its subsidiary in the document.

(b) It has been further agreed that the money required by the new company to finance the creation of the factory and the commencement of manufacture shall at first be raised by Government and I.C.I taking up one half of the authorised share capital and by the company obtaining a loan or loans to provide the balance required. At some later stage some or all or the remainder of the authorised share capital should be offered to existing shareholders and to the public and the money so raised used (in part) to pay off the loan or loans then outstanding. It is I.C.I's present intention to subscribe for so much of this later issue as will ensure that it retains control of the new company.

(c) It may be convenient that I.C.I (India) should for a time hold beneficially the shares which under this agreement are to be allotted to I.C.I If this is done, I.C.I (India) will pay the amount due on allotment and subsequent calls with money borrowed from I.C.I Subsequently, I.C.I (India) may repay the loan by transfer to I.C.I of the shares so held. Government have no objection to this course of action.

(4) After formation, I.E.L will issue 20,00,000 shares and allot them as follows:

4,00,000 shares to Government

16,00,000 shares to I.C.I (or I.C.I India)

Government and I.C.I (or I.C.I India) will take up the shares respectively allotted to them.

(6) Government agree that if I.C.I makes a loan to I.C.I (India) and the latter holds shares in I.E.L in the circumstances referred to in the recitals hereto that loan may be repaid by a transfer of the shares to I.C.I at any time and I.C.I may utilise the money due to it from I.C.I (India) in the acquisition of such shares.

(7) It is recognised by Government and I.C.I that it might be undesirable to place any shares on the market until I.E.L has been in production for a minimum of three years and it is the intention of both parties to defer the sale of any shares held by them until that time unless they both agree that any earlier sale is not objectionable. It is agreed that either party desiring to sell any such shares will notify the other before taking any steps to do so.

(i) It is agreed that so long as Government and I.C.I or (I.C.I India) are the beneficial owners (either directly or through nominees) of the whole of the issued share capital, directors shall be elected as follows:

(a) Five persons nominated by I.C.I (India) of whom three shall be resident in India and one of whom shall be chairman and other manager of I.E.L's factory.

(b) One person nominated by Government.

(4) In so far as a loan in excess of Rs. 1,00,00,000 is required to carry out the programme contemplated by this declaration, I.C.I undertakes that it will procure that such a loan is made until the total capital of I.E.L (whether by share capital or loans) amounts to Rs. 4,00,00,000.

(i) Government agree that in the event that I.C.I provides capital in excess of 51% of the issued share capital of I.E.L whether such capital be in the form of share capital or loans, I.C.I shall be at liberty at any time on the realization or repayment of such capital to remit such excess in sterling to England.

8. Duration of Agreement.— Twenty years or so long as I.C.I retains a controlling interest in the new company whichever period be the shorter.”

4. Thereafter, admittedly pursuant to the said scheme of arrangement, the London company made advances to its Indian subsidiary, I.C.I India Ltd., for acquisition of the shares in the said three companies from time to time between 30th of September, 1954, to 30th of November, 1957. The total amount and the respective dates of advances for the purchase of the shares of the said companies are set out in paragraph 5 of the petition and are at pages 5 and 6 of the paper book. It further appears that in order to avoid double taxation both in India and U.K and with a view to save tax and get benefits under section 15C and section 56A of the Indian Income-tax Act, 1922, it was decided by the London company and its subsidiary in India that the said agreement would be made for purchasing shares in the name of the I.C.I (India) Ltd. in the said three companies with the foreign exchange advanced by the London company under the said declaration of intention dated the 5th of November, 1953. Thereafter, when the Finance Act, 1959, came into force and withdrew the tax reliefs as dividend, it was decided by the London company to exercise its right to call for the transfer of the shares of the said three companies from the I.C.I (India) Ltd. and, as a result thereof, on the 16th of February, 1961, the London company exercised its right which was duly approved by the Reserve Bank of India and such transfer was completed in March and April, 1961. The A.C.C.I shares were transferred by the I.C.I (India) Ltd. to the London company on the 17th of March, 1961, the I.E.L shares were transferred on the 25th of March, 1961, and the Atic shares were transferred on the 8th of April, 1961. As it has been stated earlier under the arrangement all these transfers were made at the face value of the shares in the said three companies by the Indian company to the London company. It is also an admitted case that the London company is an assessee under the Income-tax Act and submitted its return for the assessment year 1962-63 on the 28th of July, 1962, disclosing the business income in respect of the year ending 31st of December, 1961 and, inter alia, the income from other sources which included the interests paid by the I.C.I (India) Ltd. to the London company under the said arrangement for loans advances made for the purchase of the shares in the said three companies. It further appears, as an undisputed and uncontroverted fact, that in the course of the assessment proceeding for the said assessment year 1962-63 Mr. N.L Gangadharan, the representative of the appellant, appeared before the then Income-tax Officer, Mr. M.S.M Maraikayar, and had various discussions with him in the course of the said assessment proceeding. In fact, it also appears that, by a letter dated the 23rd of June, 1965, addressed by the appellant to the said Income-tax Officer, the appellant forwarded at the request of the said Income-tax Officer copies of the correspondence relating to the said loan arrangement between the London company and the I.C.I (India) in respect of the investment in the shares of A.C.C.I Ltd. The said letter along with the endorsement of the Income-tax Officer acknowledging the recepit of the said copies of correspondence is annexed to the petition and would appear at page 115 of the paper book and is set out hereunder:

“Z/8/223rd June, 1965.

The Income-tax Officer,

Companies District IV,

“B” Ward,

P-7, Chowringhee Square,

Calcutta.

Dear Sirs,

Imperial Chemical Industries Ltd.,

London:

1962/63 Assessment.

As requested by you, we attach herewith copies of correspondence covering the loan arrangement between I.C.I Ltd. and I.C.I (India) Private Ltd., in respect of the investments in the ‘A’ ordinary shares of the Alkali & Chemical Corporation of India Ltd.

Please note that the ‘A’ ordinary shares, which were held by I.C.I (India) Private Ltd., on behalf of I.C.I Ltd., were transferred to I.C.I Ltd. on 17th of March, 1961.

Yours faithfully,

For Imperial Chemical Industries Limited,

For I.C.I (India) Private Ltd.,

Agents,

B.M Palit,

Encl:Chief Taxation Officer”

5. There is no dispute that the same arrangement was made also relating to the shares of other two companies being I.E.L Ltd. and Atic Ltd. Here it will be convenient to mention that in the course of arguments in this appeal it was contended by Mr. Balai Pal, counsel for the respondent, that at no point prior to 11th of December, 1968, the Income-tax Officer had copies of the memorandum of association of the London company and as such he had no opportunity to consider the clauses therein to ascertain the objects and power of the London company.

6. Dr. Debi Pal, appearing for the appellant with the leave of the court, produced certain correspondence between the Income-tax Officer and the representative of the London company which clearly show that copies of the memorandum and articles of association was asked for by the then Income-tax Officer for assessing the London company for the assessment year 1959-60. Leave was given to the appellant to file a supplementary affidavit annexing the copies of the said correspondence and the respondents were also given liberty to file an affidavit dealing with the same. Pursuant to such leave, affidavits were filed annexing the copies of the relevant correspondence which clearly, conclusively and beyond any doubt prove that memorandum and articles of association of the London company were duly furnished by the London company through its representative in India to the then Income-tax Officer, Mr. S.N Srivastava in relation to the income-tax assessment of the London company for the assessment year 1959-60. The respondents strangely enough simply stated that those correspondence are not available in the record of the income-tax department. In the circumstances, it is only legitimate to presume that the respondents had the copies of the memorandum and articles of association of the London company in its record since 29th of September, 1961. Further it appears that in relation to the assessment of the Indian Explosives Ltd. some of the clauses of the memorandum of association of the London company have been referred to by the Income-tax Officer concerned in his letter dated the 25th of January, 1962, which is at pages 441-444 of the paper book. It is true that only some of the clauses of the memorandum of the London company were referred to in relation to the assessment of I.E.L But, reading the said letter dated the 25th January, 1962 and the correspondence which have been disclosed by further affidavits filed by the appellant in this court, it is abundantly clear that the respondents had in their possession the memorandum and articles of association of the London company since 1961 which it obtained from the London company for the purpose of its record. It must be held as a fact established conclusively that the income-tax authorities being the respondents, in fact, were in possession of these documents long prior to 11th of December, 1968. See also Union of India v. Rai Singh Deb Singh Bist, [1973] 88 ITR 200 (SC).

7. It is very seriously contested and disputed by the income-tax authorities as to whether there was discussion between the appellant's representative with the Income-tax Officer for the relevant year, that is, assessment year 1962-63, and also in relation to the previous assessment year 1961-62. In fact, Mr. Balai Pal, appearing for the respondents, commented that there was no affidavit from Mr. N.L Gangadharan, the representative of the appellant, who was alleged to have had discussion with the Income-tax Officer regarding the nature of the transaction, that is, the loan and the transfer of the shares. But it may be noted that the record itself being, the assessment orders for the said two assessment years 1961-62, and the correspondence dated the 27th of July, 1965, which are undisputed documents and in fact cannot be disputed, clearly and conclusively prove from the intrinsic evidence contained therein that there was such discussion as alleged by the appellant and the onus shifted to the respondents to disprove the said fact by filing an affidavit, if the allegations of the appellant were not true, through the said Income-tax Officer concerned, that is, Mr. M.S.M Maraikayar, with whom the discussion took place. The respondents having not done so and merely denied the fact which is against the admitted documentary evidence produced by the appellant, it cannot be accepted, and it must be held that the appellant's contentions are true and correct. In’ this connection reference may be made to a letter dated the 2nd of January, 1962, which is at page 177 of the paper book being a letter written to the Income-tax Officer concerned in respect of the assessment of the appellant for the assessment year 1961-62. The said letter would appear at pages 37-39 of the additional paper book and the relevant portions are as follows:

“Z/A/12nd January, 1962.

The Income-tax Officer,

‘C’ Ward,

Companies District IV,

5, Government Place, West, Calcutta.

Dear Sir,

Imperial Chemical Industries Limited, London,

1961-62 assessment.

We enclose the following in respect of the above assessment:

Both the Atic loan and the A.C.C.I loan were advances made by I.C.I, London to I.C.I (India) for the purchase of shares in the two companies in question. Part of the arrangement as regards the payment of interest on these loans was that interest would only be payable by I.C.I (India) for the accounting years in respect of which they received dividend income on the shares. Provisional debits of interest were made monthly by I.C.I through their current account with I.C.I (India) and consequently in the 1960 accounts of I.C.I (India) a provisional debit was charged for interest on the A-C.C.I loan in respect of the year ended 30th September, 1960, and the tax appropriated to this interest, namely, Rs. 6,06,384.36 was paid over to the Indian revenue in the usual way and debited to I.C.I, London's current account with I.C.I (India).

The shares in A.C.C.I which had been purchased out of the loan were subsequently transferred to I.C.I, London, in discharge of the loan under the terms of the original agreement under which the loan was made to I.C.I (India) by I.C.I London. As a result, no dividend income was receivable by I.C.I (India) in respect of the year to 30th September, 1960, and consequently no interest was payable to I.C.I London on the loan for that year. The provisional charge in the 1960 accounts for I.C.I (India) was, therefore, reversed in the accounts for the following year, I.C.I London crediting I.C.I (India) through their current account with the gross interest. I.C.I (India) were not of course in a position to repay I.C.I London the tax with which they had been wrongly charged on this interest and an application for a refund of this tax is now made. I.C.I (India) is not claiming the allowance of the interest charge in the 1960 accounts against profits assessable to tax. Similarly the credit back of this interest in I.C.I (India)'s 1961 accounts will be excluded from assessable income.”

8. It appears from the assessment order of the appellant for the assessment year 1961-62 which was made on the 29th of May, 1965, by Mr. M.S.M Maraikayar and which is at pages 40-44 of additional paper book, (sic) inter alia, it is recorded as follows:

“Date of order: 29-5-65.

ASSESSMENT ORDER

9. The assessee-company carries on business in sale of dye stuffs and chemicals in India. Besides, it receives income being interest, royalty, technical fees and dividends from the Indian Cos. For this year it has filed a return of income admitting a total income of Rs. 1,08,90,033. In response to the notice u/s. 143(2), Shri Gangadharan of the Co. was present. I have discussed the case with him.

2. During the year of account the company received the following amounts as interest from I.C.I (India) Pvt. Ltd.:

(a) Rs. 5,50,000 being interest on the loan advanced by the assessee-company for the purpose of purchase of shares in M/s. Atic Industries Ltd. by I.C.I (India) Pvt. Ltd.

(b) Interest on current account: Rs. 43,624.

(c) Rs. 9,62,515 being interest on the loan advanced for purchase of shares in Alkali and Chemical Corporation of India Ltd.

The company has filed tax deduction certificates in respect of the above three items of interest issued by the paying company, viz., M/s. I.C.I (India) Pvt. Ltd. However in the return of income filed, it has admitted only the first two items of interest receipts totalling Rs. 5,93,624. The sum of Rs. 9,62,515 being the interest received on account of the A.C.C.I loan has not been admitted by the company. It is claimed by the company that the loan in respect of which the interest of Rs. 9,62,515 is receivable by it was advanced for the specific purpose of purchase of shares issued by M/s. Alkali & Chemical Corporation of India Ltd. The interest payable by I.C.I (India) Pvt. Ltd. was made conditional on the fact of the latter company earning dividend in respect of the shares………….

10. The claim of the company that the interest payable on the loan was conditional on the Indian Co. earning dividend income is not borne out by the entries made in its books of accounts. As already pointed out above the interest has been claimed by the Indian Co. even before the fact of any dividend.

It is admitted that the loan came to be repaid only by transfer of shares and such transfer of shares took place after 30-9-60. Therefore, for the period ended 30-9-60, the London Co. is entitled to receive the interest and hence assessable on the same…………

1. The total income and tax payable is determined as under:

Rs. Rs. Rs. (1) Business income as returned 24,54,479 (2) Other sources (a) Dividend Co. from Tax Credit: 60,63,686 I.T 10,99,096.14 S.T 3,00,000.00 (b) Technical fees as admitted Tax Credit: 2,32,608 I.T 46,539.37 S.T 1,00,059.65 (c) Royalty 15,45,436 Tax Credit: I.T 3,09,087.64 S.T 6,64,537.21 (d) Interest Tax Credit; 15,56,139 I.T 3,11,226.00 S.T 6,69,139.00 93,98,069 Total income 1,18,52,548

11. Then in respect of the assessment years 19-62-63, and 1963-64, it appears from a letter dated the 27th of July, 1965, that the said Mr. N.L Gangadharan, the representative of the appellant, had discussion with the Income-tax Officer, inter alia, in respect of the said transaction of loan. A copy of the said letter would appear at page 45 of the additional paper book and is set out below:

“Z/2/2(1963/64)27th July, 1965.

The Income-tax Officer,

Companies District IV,

P-7, Chowringhee Square,

Calcutta.

Dear Sir,

Imperial Chemical Industries Ltd. London

1962/63 & 1963/64, assessments.

We refer to the discussion the undersigned had with you in connection with the above assessments of I.C.I Ltd.

1. We enclose extracts from the minutes of the meeting of the board of directors of I.C.I (India) held on 27th March, 1957, and 30th September, 1958, wherein the rate of interest payable on loan of Rs. 180 lakhs from I.C.I was approved at 1½% above the Indian bank rate with a minimum of 5% per annum.

2. The research contributions payable by Atic were in the nature of contributions towards the research expenditure incurred by I.C.I and, therefore, the Rolls Royce Ltd. v. Jeffrey (Inspector of Taxes) case does not have any relevance to the subject.

Yours faithfully,

for Imperial Chemical Industries Ltd.

for I.C.I (India) Private Ltd., Agents.

N.L Gangadharan,

for Chief Accountant.”

Another letter dated the 2nd of August, 1965, in respect of the assessment of the appellant for the year 1962-63, to the Income-tax Officer in which it is recorded that there was telephonic discussion between the said N.L Gangadharan and the Income-tax Officer in connection with the said assessment year relating to the transfer of the shares. The said letter is at page 47 of the additional paper book and is set out hereunder:

“Z/2/2(1962/63)2nd August, 1965.

The Income-tax Officer,

Companies District IV,

P-7, Chowringhee Square,

Calcutta.

Dear Sir,

Imperial Chemical Industries Ltd.

1962/63, assessment.

You refer to the telephonic conversation our Mr. N.L Gangadharan had with you in connection with the above assessment and we confirm having advised you:

1. That the ordinary shares in Indian Explosives Limited which were held by I.C.I (India) Private Limited on behalf of Imperial Chemical Industries Limited were transferred to Imperial Chemical Industries Limited on 23rd February, 1961.

2. That the details of interest exempt from tax under section 10(15)(iv)(c) received by Imperial Chemical Industries, are as under:

The Alkali & Chemical Corporation of India Ltd.

Rs. Exempt from tax vide Government of India's letter dated 26-11-59 forwarded to you under cover of our letter dated 15-7-65 (enclosure G)… 4,565 Exempt from tax vide Government of India's letter dated 9-7-58 forwarded to you under cover of our letter dated 15-7-65 (enclosure H)… 12,622 Indian Explosives Limited. Indian Explosives Limited. Exempt from tax vide Government of India's letter dated 19-12-58 forwarded to you under cover of our letter dated 15-7-65 (enclosure I)… 13,040 30,227

Yours faithfully,

For Imperial Chemical Industries. Ltd.

For I.C.I (India) Private Ltd., Agents.

(Sd.) B.P Palit,

Chief Taxation Officer.”

12. From those correspondences and the assessment order dated the 29th of May, 1965, it is clearly and conclusively established that the Income-tax Officer concerned had discussions about the nature of the transaction of the said transfer of shares to the appellant by I.C.I (India). And the interest paid by the I.C.I (India) Ltd. on the basis of declaration of dividend by the said three companies, were taxed under the heading “Other sources”. Therefore, by no stretch of imagination it can be alleged that the appellant did not disclose all the relevant facts including the memorandum and articles of association and the nature of the transaction which ultimately resulted in the transfer of the shares of the three companies being A.C.C.I Ltd., I.E.L Ltd. and Atic Ltd. by the I.C.I (Indial Ltd. on the respective dates which have been mentioned earlier. The assessment of the appellant for the assessment year 1962-63 was completed oil the 27th of July, 1965, which was served on the appellant on the 7th of August, 1965. The letters dated the 27th July, 1965, and 2nd of August 1965, have already been set out before, which clearly record the fact of discussion between Mr. N.L Gangadharan, the appellant's representative, with the Income-tax Officer concerned regarding the said loan transactions leading to the transfer of the said shares under the arrangement. Thereafter, another chapter was opened by the Income-tax Officer by successive notices being served, the first was on the 29th of March, 1967, being the notice under section 16(1) of the Gift-tax Act issued by the Gift-tax Officer, ‘B’ Ward, Companies District IV, to I.C.I (India) Ltd. asking it to submit the return of gift alleged to have been made by the said I.C.I (India) Ltd. in the assessment year 1962-63, being the transfer of the shares in the said three companies being A.C.C.I Ltd., I.E.L Ltd. and Atic Ltd. to the appellant otherwise than for adequate consideration. The said notice is set out at page 304 of the paper book in this appeal.

13. It is not necessary to go into the details of the various stages of the said proceedings which started with the said notice under the Gift-tax Act. The Income-tax Officer assessed the I.C.I (India) Ltd. for the assessment year 1962-63, pursuant to the said notice by his order dated the 30th of March, 1967, and the said order of the Income-tax Officer was set aside by the Appellate Assistant Commissioner of Income-tax by his order dated the 18th of October, 1967. From the said order of the Appellate Assistant Commissioner, the income-tax authorities preferred an appeal to the Income-tax Appellate Tribunal which by its elaborate and well reasoned order rejected the said appeal on the 19th of February, 1969. The income-tax department made an application under section 256(1) of the Income-tax Act, 1961, for reference to be made to this High Court which was rejected by the Tribunal on the 28th of July, 1969. On the 8th of September, 1970, an order was made by this High Court directing the Tribunal to refer certain questions of law in respect of the said appeal of I.C.I (India) Ltd. for the assessment year 1962-63, relating to the alleged sale of the said shares to I.C.I, London, that is the appellant. Ultimately, on the 20th of January, 1972, the appeal preferred by the I.C.I (India) Ltd. against the order made by the High Court dated the 8th of September, 1970, was allowed by the Supreme Court of India upholding the decision of the Tribunal and also with the observation about the correctness of the finding of facts as to the nature of the transaction involving the said transfer of the shares by the I.C.I (India) Ltd. to the appellant. The finding on basis of primary fact as to the nature of the transaction by the Tribunal was affirmed by the Supreme Court in the said proceeding. In any event, the Tribunal was the final judicial authority on facts.

14. During the course of the said independent proceeding regarding the income-tax, against the I.C.I (India) Ltd., that is, the appellant's hundred per cent. subsidiary relating to the said transfer of shares in the three companies under the arrangement of the loan and advances pursuant to the declaration of intention dated the 5th of November, 1963, all of which have been referred to earlier, another parallel proceeding was started against the appellant which has ultimately given rise to this appeal. That was the first notice under section 148 of the Income-tax Act, 1961, served on the appellant for reopening the assessment of the appellant for the assessment year 1962-63. The alleged reason for such reopening as recorded by the Income-tax Officer for issuing the said notice under section 148 dated 23rd of September, 1968, is at pages 49 and 50 of the additional paper book wherein it is, inter alia, alleged that the appellant has made a profit of about Rs. 14,40,62,901 as a result of the said transfer of shares in the three companies by the I.C.I (India) Ltd. in repayment of the loan advanced from time to time at face value of the shares. It is alleged that the appellant should have declared the said amount being the difference between the market price and the face value of the said shares in the said three companies as its profits and due to such failure the income has escaped assessment for the year 1962-63, of the appellant. Pursuant to the said 1st notice dated the 23rd of September, 1968, the appellant, after asking for the reasons for such reopening of the assessment for the assessment year 1962-63, which was supplied in due course by the income-tax authorities (sic) the appellant was also served with the notice under section 143(3) of the Income-tax Act, 1961, by respondent No. 1, for production of documents and evidence pursuant to the return filed by the appellant. It may be mentioned, that by a letter dated the 17th of October, 1968, the appellant, inter alia, protested against the said reopening of the assessment for the assessment year 1962-63 of the appellant on the ground that the conditions precedent to take action under section 147 of the Income-tax Act, 1961, are not satisfied in this particular case and the notice under section 148 was without jurisdiction and ought to have been withdrawn and without prejudice the appellant filed a return disclosing the same income which resulted in the assessment order dated the 27th of July, 1965. The Income-tax Officer who is now one, Mr. S. Raman, by a letter dated the 13th of November, 1968, fixed the hearing of the appellant's case pursant to the said notice under section 148 of the Income-tax Act, for the assessment year 1962-63 on the 2nd of December, 1968, at 11 a.m and the appellant was also requested in the meantime to furnish an attested copy of the memorandum and articles of the association of the company and a world balance-sheet for the assessment year 1962-63. Pursuant to the said notice the appellant on the 11th of December, 1968, duly furnished the copies of the world balance-sheet, articles of association and memorandum of the appellant to the Income-tax Officer. Thereafter, it appears that nothing happened in respect of the proceeding under section 148 of the Income-tax Act, pursuant to the said first notice dated the 23rd September, 1968, served by respondent No. 1, on the appellant. Then suddenly on the 7th May, 1970, the respondent No. 1, informed the appellant that the proceedings under section 148 of the Income-tax Act, 1968, for the assessment year 1962-63, consequent to the said 1st notice dated the 23rd of September, 1968, were dropped. It appears that immediately on the next day, i.e, on the 8th May, 1970, the Income-tax Officer recorded his reasons for issuing another notice which may be called the second notice under section 148 of the Income-tax Act, which is the subject-matter of challenge in this appeal. The said reasons would appear at pages 51-53 of the additional paper book which, in substance and effect, are the same reasons for escapement of the income resulting from the alleged profit made by the appellant by the transfer of the shares in the three companies at par value being the exact amount of alleged profit under the previous notice. Only with the additions of grounds that, under clause 4(1) of the memorandum of association, the appellant was carrying on business as capitalist and financier of associated companies and as such the appellant should have shown the interest received from the loan as income from interest and net income from other sources. It was further stated that the difference between the market price and the face value of the transfer of shares represented the business profit and has not been shown as such, and thirdly, the appellant did not file the memorandum, articles of association and the world balance-sheet at the time of original assessment for the year 1962-63, before the Income-tax Officer and, therefore, the appellant was guilty of failure to disclose all the said primary facts of the appellant's business income to the extent of the said sum of Rs. 14,40,62,901 which has escaped assessment being the identical figure of the first notice. Thereafter, on the 20th of May, 1970, the present impugned notice under section 148 of the Income-tax Act, 1961, was issued to the appellant and, after several correspondence regarding disclosing the reasons of such reopening which the respondents refused to do, on the 7th of July, 1970, the respondent No. 1 served the other two notices under section 142(1) and section 143(2) of the Income-tax Act, 1961, to the appellant for proceeding with the said notice dated the 20th of May, 1970. On the 14th of September, 1970, representations were made by the appellant to the Central Board of Direct Taxes against the said impugned notices under sections 148, 142(1) and 143(2) being dated the 20th of May, 1970, and 7th of July, 1970, respectively. It appears that on the 26th of December, 1970, and 29th of January, 1971, the Income-tax Officer fixed the date of hearing pursuant to the said impugned notices and adjournment was asked for by the appellant of the proceedings till the decision of the Central Board of Direct Taxes. On the 5th of April, 1971, the Central Board of Direct Taxes informed the appellant that the Board declined to interfere in the matter. Thereafter, the appellant served a letter demanding justice on the 28th of May, 1971, and on the 11th of June, 1971, filed the writ petition challenging the said impugned notices in this High Court.

15. A.K Sinha J., issued the rule nisi and restrained the respondents for a period of eight weeks in the first instance from proceeding with reassessment for the assessment year 1962-63, in pursuance of the said impugned notices and taking further steps in pursuance thereto and liberty was given to the appellant to make fresh application for extension of the interim order with notice to the respondents. The said rule is at pages 388-391 of the paper book. It appears that the appellant, by a petition dated the 16th of July, 1971, moved for extension of the interim injunction and the respondents filed their affidavit-in-opposition on the 26th of August, 1971, and the affidavit-in-reply in the said application was filed by the appellant on the 27th of November, 1971. Finally, the rule was heard by Ghose J. and by the judgment and order appealed from, passed on the 10th of September, 1973, the rule nisi was discharged and operation of the order was stayed for four weeks after the long vacation of 1973. The appellant preferred this appeal on the 19th of September, 1973, and the stay was continued till the disposal of the application before the appeal court constituted by B.C Mitra and A.K Janah JJ.

16. From the above facts it appears that the appellant's transaction was under the arrangement and agreement which was arrived at and recorded between the Government of India, the appellant, i.e, I.C.I London and I.C.I (India) Ltd., by the declaration of intention dated the 5th of November 1953, relevant portion of which has been set out before. Loans and advances were made by the appellant from time to time, to the I.C.I (India) Ltd., its hundred per cent. subsidiary for requisition of the shares of the said three companies, viz., A.C.C.I Ltd., I.E.L Ltd. and Atic Ltd., and finally, the said shares were recalled in repayment of the loans and advances made by the appellant under the said arrangement and agreement from diverse dates in 1961, as has already been stated before. The said recalling of loans and advances by transfer of the shares of the said three companies by the I.C.I (India) Ltd., to the appellant have given rise to several proceedings first for capital gains tax against the I.C.I (India) Ltd., which ultimately failed. Simultaneously, for proceeding against the appellant for reopening the assessment for the assessment year 1962-63, the first notice was issued on the 23rd of September, 1968, and after proceeding with the same it was suddenly dropped on the 7th of May, 1970, and immediately thereafter the second notice was issued followed by consequential notices which are the subject-matter of challenge in the writ petition filed by the appellant. It is admitted that the gift-tax proceeding against the I.C.I (India) Ltd. in respect of the same transaction is now pending. It appears that the nature of the transaction involved in this appeal which has been finally concluded by the Supreme Court affirming the Tribunal's finding which is the fact finding authority in respect of section 52 of the Income-tax Act proceeding against the I.C.I (India) Ltd. would appear from the relevant portions of the order of the Appellate Tribunal, copy of which is in the appeal paper book, at pages 245-274. After discussing and analysing the facts leading to the said transaction between I.C.I (India) Ltd. and the appellant, the Tribunal in paragraph 20 at page 258 of the paper book gave its finding as to why the appellant entered into the said arrangement of purchasing the shares of the three companies through its hundred per cent. subsidiary by advancing loans from time to time. The said paragraph 20 is set out hereunder:

“20. We may briefly explain why I.C.I wanted to have the shares held in the name of the assessee before being “taken over” by I.C.I Section 15C gave relief from income-tax in respect of dividends from new undertakings and section 56A gave relief from super-tax on dividends from companies carrying on manufacture of particular items set out therein. As I.C.I is a U.K company, it would be assessable in U.K, on its income including the dividends from India, if it held the shares directly. The relief under sections 15C and 56A would be of no use to it as the dividends which got relief from tax in India would be fully taxed there. The double or unilateral reliefs granted in U.K would not be also of help as in India it would have paid less tax and the U.K rates would be higher. The result would have been that the tax at the U.K rate, which would, in the context, be higher would have been payable on the Indian dividends. It is this aspect which ultimately led to its suggestion that the assessee should hold the shares, the necessary finance being found by I.C.I The above background would show that the idea was not to make the assessee the real beneficial owner of the shares. The fact that the shares should be held only for a time beneficially by the assessee is clear from the “declaration of intention” dated 5th November, 1953.”

17. Then at pages 261-262 of the paper book in paragraph 30 the Tribunal, after discussing the arguments and the facts, held as follows:

“……… Taking this along with the minutes of the meeting with the officials of the Government of India in October, 1953, it is clear that the whole idea of I.C.I throughout was to make some funds available to the assessee so that the shares could be acquired in its name and that the shares could be transferred to I.C.I as and when it demanded. The earliest expression that is used is ‘take over’……… In our opinion the very words ‘take over’ in the context of the relationship between the assessee and I.C.I go to show that the idea was to take back the shares in discharge of the loan. Otherwise, there was no need to mention to the officers of the Government of India as early as October, 1953, that the assessee wanted to have the shares held by the Indian company so as to get the benefit of section 15C and section 56A. The mention of this aspect goes to show that the assessee would have subscribed for the shares by itself but for the fact that it did ndt want to lose certain benefits under sections 15C and 56A if it directly held that shares. Even if it be a transaction between the principal and the subsidiary—the subsidiary was doing well in India it would be too much to expect that the I.C.I should have given interest from lease (sic) so as to enable the assessee not only to earn dividends and retain the amounts but also to take advantage of any increase in prices. Taking into account the correspondence and the documents which we have referred to earlier, we are satisfied with the assessee's case that the transfer of shares to London at issue price at par was throughout the basis of the advance of loan to the assessee.”

18. Then, again at page 265 of the paper book, paragraph 34, the Tribunal observed as follows:

“……… We have to find out the object of the transaction. It is removed in point of time from the result. In such a case one cannot try to infer the object from the results. We really have to put ourselves at a point of time when the transaction was conceived. Taking the result would be to project the enquiry to a different point of time, i.e, when the result is realised. This would be wrong and contrary to the statutory postulates. Taking the materials before us, we consider that there is nothing to suggest that the parties had the capital gains tax in their mind in 1957 and later when they put through the aforesaid transactions. We have, therefore, to hold that the factual requisites of section 52 have not been established here.”

19. Then again in paragraph 35, at page 265 of the paper book, the Tribunal observed as follows:

“……… The arrangement between the parties was also recorded in a minute of the assessee-company on 9th December, 1968. It is true that the transaction was put through after the capital gains levy was revived. However, that by itself is not enough to show that the whole transaction was conceived with the object of avoidance or reduction of liability to capital gains tax. The whole scheme is the same as for the sum of Rs. 160 lakhs. Whatever we have stated earlier would apply to this case also.”

20. Then again in paragraph 36, at pages 265-266 of the paper book, the Tribunal observed as follows:

“36. It remains for us to deal with the transaction relating to the shares in the other two companies. The scheme for manufacturing polythene by A.C.C.I was placed before the Government of India, by a letter of the assessee dated 13th December, 1965, addressed to H.V.R Iyengar, Secretary, Ministry of Commerce and Industry. In paragraph 7 of the annexure to that letter it was specifically stated that to enable the assessee to subscribe for the new shares, I.C.I would lend the subscription monies to the assessee on the understanding that at a later date I.C.I could acquire at the issue price, these new shares in satisfaction of its loan. In the application to the Controller of Capital Issues it was mentioned (page 176 of book I) that the assessee has undertaken to subscribe at the issue price for the new shares to be provisionally allotted to the assessee strictly in accordance with its present shareholding. It is also mentioned that the share could be acquired at the issue price by I.C.I”

21. The Tribunal after dealing with the arguments on behalf of the income-tax authorities and also the facts at page 269 of the paper book paragraph 40 held as follows:

“40. In paragraph 53 of the Appellate Assistant Commissioner's order, the Appellate Assistant Commissioner has referred to three affidavits. He has also mentioned that the department had not cross-examined the deponents. He took the statements in the affidavits as correct. Before us, the learned counsel for the department stated that he accepted the affidavits as correct in so far as the facts were concerned and he disputed only the inference therefrom. In our opinion, if the facts mentioned therein are taken as correct, the inference that the transaction was not for the purpose of avoiding or reducing liability to capital gains tax has to follow……”

22. It is true that the question before the Tribunal was whether section 52 of the Income-tax Act, 1961, was attracted in relation to the said transaction of advancing loan by the appellant to its hundred per cent. subsidiary, I.C.I (India) Ltd., who was the assessee in the said proceeding before the Tribunal and acquired the shares of the said three companies, viz., A.C.C.I Ltd., I.E.L Ltd. and Atic Ltd. out of the loans advanced by the London company from time to time and finally transferred the said shares at par to the London company pursuant to the said agreement and arrangement between the parties concerned. The Tribunal held on findings on the basic nature of the transaction and the intention of the parties which was quite open and clear by virtue of correspondence and particularly the declaration of intention dated the 5th of November, 1953, which has been mentioned earlier that the provisions of section 52 of the Income-tax Act had no application to the facts which resulted in the said transaction of transfer of shares at par value by the I.C.I (India) Ltd. to the I.C.I London, the appellant. It may be pointed out that in the order of the Tribunal “assessee” refers to the I.C.I (India) Ltd. and “I.C.I” refers to I.C.I London, that is, the appellant herein. The said findings of the Tribunal were ultimately approved and affirmed by the Supreme Court when the said matter reached there through this High Court in the reference proceeding under section 256 of the Income-tax Act, 1961. Judgment of the Supreme Court dated 20th of January, 1972, is at pages 425-444 of the paper book and is also reported in [1972] 83 ITR 710 (SC). It will be convenient to refer to the pages of the appeal paper book wherein the Supreme Court judgment has been set out. The Supreme Court observed at pages 427-428 as follows (See 83 ITR 712, 713):

“The Tribunal upheld the decision of the Appellate Assistant Commissioner by a detailed and well reasoned order.

Broadly, the case of the assessee was that I.C.I wanted to make investments in India in sterling currency. The assessee was already in existence but the other three companies, which have been mentioned, were incorporated later. I.C.I devised a scheme by which it could make the investment as desired by it and by which it could also take advantage of the tax relief which could be availed of by the new enterprises under sections 15C and 56A of the Indian Income-tax Act, 1922. The scheme in short was that I.C.I would arrange to let the assessee hold shares in the three companies by investing the money which was to be given by I.C.I to the assessee. The modus operandi was that I.C.I would give that money by way of loans to the assessee who agreed that the shares in the three companies would be transferred to I.C.I in satisfaction of the loans at par or issue price as and when desired by I.C.I All this was done after negotiations with the concerned department of the Government of India at the highest level and with the approval of the Reserve Bank of India. The entire scheme was conceived and was put into operation prior to 30th November, 1956, when the Finance Bill was introduced reimposing capital gains tax which had remained abolished for certain years. There was a provision for charging interest by the I.C.I from the assessee at a rate not exceeding ½% above the Indian bank rate which came to 5½% per annum but the interest was not to exceed in any case the dividends received by the assessee from those shares. It was claimed on behalf of the assessee that this arrangement was advantageous both to I.C.I and the assessee. I.C.I having taken the risk (of depreciation in shares or otherwise) attached to the new business pioneering adventures, ensured that capital appreciation of the shares, if any, also went to itself. The assessee did not suffer any disadvantage because it had to pay no interest if no dividend was received and it could keep and get the benefit of any dividend in excess of 5½%. As a result of I.C.I investments being held through the assessee instead of directly, I.C.I achieved an advantage of saving tax in U.K amounting to £ 68,000 in the relevant years.

In 1959 the structure of Indian taxation regarding the grossing up of dividends was radically changed and by the Finance Act, 1959, the system of grossing up of dividends (under sections 16(2) and 18(5) of the 1922 Act) was abolished and intercorporate dividends became liable to income-tax at each stage. Thus, the dividends passing from the three companies through the assessee to I.C.I became liable to tax at two stages. This affected the net return of I.C.I on its investments in the three companies substantially. In these circumstances, it was decided by I.C.I that the investments in the three companies should be held by it directly. For that reason it called upon the assessee in February, 1961, to transfer to it the aforesaid shares in the three companies at the issue price in satisfaction of the sterling loans in accordance with the previous agreements. The approval of the Reserve Bank to these transfers was received in February, 1961, and the transfers were made in March/April 1961. According to the assessee there was no question of the transfer of shares having been effected with the object of avoidance or reduction of the liability of the assessee to capital gains which alone could attract the applicability of section 52 of the Act.”

23. Then at page 459 of the paper book the Supreme Court observed as follows (See 83 ITR 714):

“The Tribunal examined fully the correspondence and the other material with regard to each of the three Indian companies in which the investment had been made of the money advanced by I.C.I to the assessee.”

24. Thereafter, the Supreme Court noted briefly the discussion relating to the transaction as made by the Supreme Court and quoted the relevant portions therefrom which I have set out before. Finally the Supreme Court held at pages 438-439 of the paper book as follows (See 83 ITR 718, 719):

“We are altogether unable to see how findings of the Appellate Tribunal that the transfer of shares in the present case was not made with the intention or object of avoidance or reduction of liability to capital gains were not questions of fact and did not depend on inference of facts from the evidence or the material before the Tribunal. It can well be said that the determination of the question whether the object of the assessee was to avoid or reduce its liability to capital gains by making the transfers in question did not involve the application of any legal principles to the facts established by the evidence. The findings of the Tribunal were amply supported by evidence and were eminently reasonable. It is true that the amount involved is very large but that cannot justify a reference as under section 256 of the Act neither the Appellate Tribunal could make a reference nor could the High Court direct the reference to be made to it by the Tribunal on pure questions of facts.”

25. The Supreme Court upheld the appeal of the I.C.I (India) Private Ltd. and confirmed the finding of the basis and primary facts by the Tribunal and held that section 52 of the Income-tax Act has no application to the facts of the case having regard to the nature of the transaction pursuant to the agreement and arrangement between the parties.

26. Therefore, the whole case of the respondent, income-tax authority, is based on the alleged omission on the part of the appellant to disclose its memorandum, articles of association and world balance-sheet during the assessment for the assessment year 1962-63, which were admittedly completed by the then Income-tax Officer on the 27th of July, 1965, and communicated to the appellant on the 7th of August, 1965. That is the outcome of the difference between the first notice under section 148 of the Income-tax Act, 1961, issued on the 23rd of September, 1968, and the second notice dated the 20th of May, 1970. It is true that in the reasons for the second notice as disclosed by respondent No. 1 some elaboration of the reasons of the first notice was attempted by alleging that the appellant should have shown the interest received from the said loans and advances made to its Indian subsidiary as income in the course of carrying on business as capitalist and financier of associated companies and the difference between the market price and face value of the said shares as taken over by the appellant from its subsidiary should have been shown as business profit. It is also true that those aspects of the matter really follow from the interpretation as now sought to be put by the Income-tax Officer before issuing the second notice dated the 20th of May, 1970. It appears that factually the memorandum and articles of association were produced by the appellant long prior to December, 1968. There cannot be any doubt whatsoever that the respondents are either wrong or deliberately avoiding to admit the fact that the memorandum and articles of association were filed by the appellant when asked by the then Income-tax Officer concerned being one, Srivastava, in 1961, to which reference has already been made. The way the affidavit disclosing the relevant correspondence showing the filing of these two documents by the appellant with the income-tax authorities has been dealt with in the affidavit filed by the respondents in this appeal leads to the conclusion that the memorandum and articles of association were already in the assessment records of the appellant since 1961. The respondents simply stated through a Tadbirkar of this appeal proceeding that the said memorandum and articles of the appellant cannot be traced out, which were filed in 1961, as appearing from the correspondence disclosed by the appellant in this court. From the facts discussed above it must be held that the respondents are not correct as to the existence of one of the reasons for issuing the second notice under section 148, viz., that the appellant did not disclose its memorandum and articles of association. Moreover, it is now well settled that the memorandum is wholly irrelevant on the question of an income of a company, which solely depends on the nature of the transaction involved. Further, from the facts of this case it appears that the same amount of profit from business which respondents alleged against the appellant having escaped assessment for the assessment year 1962-63 and subject-matter of the first notice issued on the 23rd of September, 1968, were the same and identical and the Income-tax Officer had no difficulty to issue the said notice giving practically the same reason minus the clause of the memorandum of the appellant which empowers the company to finance, inter alia, its associated companies. The Supreme Court decision in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax, [1955] 27 ITR 49, where a very similar situation arose in a reference under section 66 of the Indian Income-tax Act, 1922, and one of the questions answered by the High Court in the affirmative was “whether on a proper construction of the relevant clauses of the appellant-company's memorandum of association and articles of association and on a consideration of the circumstances in which the shares of the Saraswati Sugar Syndicate were purchased and sold, it could be held that the purchase and sale of such shares was a part of appellant-company's business deal?”

27. The Supreme Court reversed the answer of the High Court and answered the said question in the negative. In that case the managing director of the assessee-company entered into an agreement to invest a large amount in a sugar company in lieu of which the managing agency of a sugar mill of the said sugar company which was to come into existence in future would be given to the assessee-company on the same terms as given to the other managing agents of other mills of the said sugar company. The said agreement was subsequently modified to the effect that the assessee-company would subscribe for the shares of the said sugar mill for the amount which was agreed to be invested by purchase of shares by the assessee-company and by their friends, in fact, shares for value of Rs. 3 lakhs were purchased by the assessee-company pursuant to the said arrangement. But ultimately, the third mill of the sugar company did not come into existence and as such the whole agreement or arrangement as intended by the parties fell through. Consequently, the assessee-company decided to sell the said shares of the sugar company from time to time which resulted in an excess of Rs. 2,26,700 over the original cost price. The said excess amount was sought to be taxed by the Income-tax Officer as profit whereas the assessee-company alleged that the same was capital appreciation. So, the only question was whether the said amount was a receipt from business or a mere appreciation of capital. The income-tax authority relied on a clause of the memorandum of association of the assessee-company which stated “to undertake the management of a commercial undertaking” and contended that the said excess amount was a profit earned in course of carrying on a business under the said object clause of the memorandum of association of the assessee-company. Mahajan C.J, at page 52 of [1955] 27 ITR 49 (SC), dealing with the question observed as follows:

“If the acquisition by the assessee-company of the managing agency of a commercial undertaking were outside the objects clause of the memorandum of association then such acquisition would have been wholly ultra vires. The circumstance whether a transaction is or is not within its powers has no bearing on the nature of the transaction, or on the question whether the profits arising therefrom are capital accretion or revenue income. The High Court recognised the fact that the main purpose of the assessee-company was to acquire a managing agency and a directorship but held that as that object was not achieved because the acquisition of the managing agency became impossible and as it withdrew the shares and sold them at a profit, it must be regarded as the profits of the business or the adventure. We think that in so holding the High Court fell into an error.

The exact nature of the business which the assessee-company was doing is admittedly not clear from the record but it is not denied that the memorandum of association of the assessee-company did not authorise it to purchase and/or sell shares as dealers nor is it denied that beyond this isolated transaction of purchase and sale the assessee-company did not deal in shares. It seems that the object of the assessee-company in buying shares was purely to obtain the managing agency of the third mill which no doubt would have been an asset of an enduring nature and would have brought them profits but there was from the inception no intention whatever on the part of the assessee-company to resell the shares either at a profit or otherwise deal in them.”

28. The same principle was also laid down by a Division Bench of this court in Commissioner Of Income-Tax, Calcutta v. J.K Eastern Industries (Private) Limited., [1965] 55 ITR 376 (Cal). Now, it may be pointed out that the clause 4(y) which was one of the basis and reasons of issuing the second notice under section 148 of the Income-tax Act, 1961, on the 20th of May, 1970, on the appellant runs as follows:

“(y) To carry on business as capitalists and financiers and to undertake and carry on all kinds of financial, commercial, trading, trust, loan, agency and other operations, and to finance and provide money to or for any of the company's associated companies or for any other company, association or firm in which the company may hold shares or other interests or with which the company may have dealings upon such security as may be thought fit or without security.”

29. Apart from the question that the memorandum of association is irrelevant for the purpose of determining whether a particular amount is profit of a company or not as the said question depends solely on the nature of the transaction which resulted in the profit being credited to the assessee-company for the said amount, in this case it must be held that the appellant-company was not guilty of omission to disclose its memorandum and articles of association sought to be alleged by the income-tax department as those documents were already in the file and produced before the Income-tax Officer in the year 1961, and there is ample material to hold that the said documents were in the file of the assessee for the relevant assessment year 1962-63. So there cannot be any question of not disclosing the said documents as sought to be alleged by the said second notice dated the 20th of May, 1970. That reason must be held to be without any basis and entirely wrong and incorrect.

30. Mr. Balai Pal appearing for the respondent also sought to contend that even assuming that the said documents were produced before the Income-tax Officer for the relevant assessment year, i.e, assessment year 1962-63, by the appellant it would not amount to disclosure within the meaning of Explanation 2 of section 147 of the Income-tax Act, 1961, which runs as follows:

“Explanation 2.— Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.”

31. The said Explanation refers to voluminous account books and similar other documents which require very careful scrutiny and material evidence cannot be discovered from such documents in spite of due diligence having regard to the nature of the documents. As for example, if voluminous accounts and account books are produced before the Income-tax Officer without pointing out the relevant entries in the books of account, that would not amount to disclosure within the meaning of section 147(a) of the Income-tax Act, 1961. The word “not necessarily” in the said Explanation 2 is very significant and clearly indicates that whether it is a disclosure or not within the meaning of the said section 147A would depend on the facts and circumstances of each case, that is the nature of the document and circumstances in which it is produced. A memorandum or articles of association of a company cannot come within the meaning of the said Explanation 2. The production of the said two documents before the Income-tax Officer would be enough to enable the Income-tax Officer to draw inferences of law. It is part of the Income-tax Officer's duty and functions to be discharged, with which the assessee has got nothing to do. It is not expected that the assessee will explain clause by clause the articles of association and the memorandum of association to the Income-tax Officer to make him understand the legal effects and inferences possible from such documents. If the said two documents are produced it would be enough and that would amount to disclosure within the meaning of section 147(a) of the Income-tax Act, 1961.

32. Therefore, there is no substance in the contention of Mr. Balai Pal that production of the said two documents, i.e, memorandum of association and the articles of association of the appellant, was not enough so as to amount to disclosure within the meaning of section 147(a).

33. It is now well settled that the purpose, scope and effect of the memorandum of association of a company are really two fold:

“In the first place it gives protection to subscribers, who learn from it the purposes to which their money can be applied. In the second place, it gives protection to persons who deal with the company, and who can infer from it the extent of the company's powers. The narrower the objects expressed in the memorandum the less is the subscriber's risk, but the wider such objects the greater is the security of those who transact business with the company…………”

34. For the purpose of determining whether a company's substratum is gone, it may be necessary to distinguish between power and object and to determine what is the main or paramount object of the company but I do not think this is necessary where a transaction is impeached as ultra vires. A person who deals with a company is entitled to assume that a company can do everything which it is expressly authorised to do by its memorandum of association, and need not investigate the equities between the company and its shareholders.

35. Those are classic passages in Cotman v. Brougham, [1918] AC 514 (HL) as laid down by Lord Parker. Recently the construction of clauses of memorandum of association came up before the English Court of Appeal in Introductions Ltd. v. National Provincial Bank Ltd.. The trial court decision is reported in [1968] 2 All ER 1221, which was affirmed by the Court of Appeal and reported in [1969] 1 All ER 887 : [1969] 39 Comp Cas 919 (CA).

36. The Court of Appeal upheld the decision of the trial court of Buckley J. In that case a company was incorporated for the purpose of offering services and informations to visitors from overseas in connection with the Festival of Britain and thereafter the visiting businessmen generally. The company's memorandum of association contained an assembly of diverse objects and powers and ended with a clause declaring that each preceding clause should be construed independently of, and shall be in no way limited by reference to, any other sub-clause and that the objects set out in each sub-clause are independent objects of the company. Under a clause of the memorandum, power was given to the company to borrow or raise money in such manner as it thought fit. For some years after incorporation the company carried on its main business, that is, providing accommodation and services to visitors coming from abroad. Thereafter, it appears that the shares of the company changed hands and the board of directors were completely changed. Company started pig breeding as its only business and borrowed money on the security of debentures from the bankers who were fully aware that the only business carried on by the company was pig breeding which was ultra vires the objects of the company as set out in the memorandum of association of which the bank had a copy. The company was put into compulsory liquidation and the question arose whether the borrowing from the bank was intra vires the company. The trial court held that on a true construction of the memorandum and articles of association of the company the business of pig breeding was ultra vires the company and also held that on a true construction of the borrowing power in the relevant clause of the memorandum of association it was wholly incapable of being independent object, under the final provision in the memorandum declaring all these objects to be independent. In that case, the first four sub-clauses of the object clauses of the memorandum of association defined the main objects of the company which has already been stated before. The clause under consideration before the courts of England were as follows:

“To borrow or raise money in such manner as the company shall think fit and in particular by the issue of debentures, or debenture stock perpetual or otherwise and to secure the repayment of any money borrowed or raised by mortgage, charge or Hen upon the undertaking and the whole or any part of the company's property or assets whether present or future including its uncalled capital and also by a similar mortgage, charge or lien to secure and guarantee, the performance by the company of any obligation or liability it may undertake.”

37. And the object clause in the memorandum of association of the company ended with the clause as follows:

“It is hereby expressly declared that each of the preceding sub-clauses shall be construed independently of and shall be in no way limited by reference to any other sub-clause and that the objects set out in each subclause are independent objects of the company.”

38. In the light of those main object clauses in the memorandum and the said two clauses which have been set out before, two questions were for consideration before the courts:

“(1) Whether, on the true construction of the memorandum and articles of association of the company, the carrying on of the business of pig breeders as its sole business was intra vires of the plaintiff-company? and

(2) On the true construction of the memorandum and articles of association of the company and in the events which happened, the borrowing by the company from its bankers were intra vires the company?”

39. It was held by the trial court, as has been stated above, that the carrying on of the business of pig breeding was ultra vires the company and the bank was not entitled to the security.

40. The Court of Appeal, upholding the decision of the trial court, Harman L.J, at page 889 of [1969] 1 All ER; 39 Comp Cas 919, 924, after dealing with the said borrowing powers clause and the independent clause of the memorandum, observed as follows:

“Of course, the original idea of that form of words was to avoid the old difficulty, which was that there was a main objects clause and all the others were ancillary to the main objects; and many questions of ultra vires arose out of that.

It was argued, therefore, that the only obligation of the defendant bank was to satisfy itself that there was an express power to borrow money, and that this power was converted into an object by the concluding words of the object clause which I have read. It was said that, if this was so, not only need the defendant bank inquire no farther but they were unaffected by knowledge that they had that the activity on which the money was to be spent was one beyond the company's powers.

The judge rejected this view, and I agree with him. He based his judgment, I think, on the view that a power or an object conferred on a company to borrow cannot remain something in the air. Borrowing is not an end in itself and must be for some purpose of the company; and, as borrowing was for ultra vires purposes, that is an end of the matter.

Counsel for the defendant bank, I think, agreed that if sub-clause (N) must in truth be construed as a power, such a power must be for the purpose within the company's memorandum. He says, that it is: ‘Elevated into an object’ (To use his own phrase) by the concluding words of the memorandum and this object being an independent object of the company will protect the lender and that that is its purpose. I answer that by saying that you cannot convert a power into an object merely by saying so. Sub-clause (N) cannot in truth stand by itself any more than certain other of the clauses of the memorandum, for instance sub-clause (D) which states:

‘To carrying on any of the trade or business… which can in the opinion of the Board… be advantageously carried on … in connection with or as ancillary to any of the above business…’

Then there is sub-clause (I), which is, ‘to promote any other company for the purpose of acquiring any property or rights or converting any of the liabilities of this company or of its undertakings. And there are other similar sub-clauses which are clearly ancillary powers although under the concluding words they are stated to be independent objects.”

41. Then, Harman L.J concluded at page 890 of [1969] 1 All ER 889; 39 Comp Cas 919, 925 (CA), after relying on the passages of the trial court judge Buckley J., reported in [1968] 2 All ER at page 1221 observed as follows:

“I agree With the judge that it is a necessarily implied addition to a power to borrow, whether express or implied, that one should add ‘for the purposes of the company’. This borrowing was not for a legitimate purpose of the company; the bank knew it, and, therefore, cannot rely on its debentures.”

42. He dismissed the appeal.

43. The principles on which object clauses of the memorandum are to be interpreted where it contains both object clauses and power clauses ending with general clause making all the clauses in the memorandum as independent of each other, has been clearly laid down in the above decision of the Appeal Court of England which is of universal application and accepted principles of law as it relates to construction of documents and to be applied by any person whose function is to discharge his duties according to well-known principles of law amongst which falls on an Income-tax Officer issuing notice, under section 148 of the Income-tax Act, 1961. It appears from the object clause of the memorandum of the appellant which is of very similar nature to the said recent English decision, that is, containing multifarious objects and power clauses concluded by a general clause making the clauses in the memorandum independent of each other, which may be quoted hereunder:

“4(A21). To do all such other things as are incidental or conducive to the attainment of the above object and that the word ‘company’ in this clause shall be deemed to include any person or partnership or any body of persons, whether incorporated or not, and whether domiciled in the United Kingdom or elsewhere, and the intention is that except as otherwise expressly provided the object set forth in each of the paragraphs of this clause shall be in no way limited or restricted by reference or inference from the terms of any other paragraph of this clause or the name of the company.”

44. The object clause in the memorandum of the appellant-company contains 47 sub-clauses of clause (4) of the memorandum of association. The main object of the company seems to be carrying on business of manufacturers of chemicals of various nature and kinds. In fact, the world balance-sheet and report of the appellant-company for the relevant year, being for the year ended 1961, clearly shows that it has built an industrial empire for the manufacture of various types of chemicals all over the world and has a large number of subsidiaries and associated companies spread over the whole world. The sub-clause (V) of clause (4) of the memorandum of objects in this context and according to the principles which had been laid down in the said recent English decision mentioned above, is nothing but a power for financing the associated and subsidiary companies of the appellant all over the world for the purpose of carrying on its main object. By no stretch of imagination or rules of construction of such document as the memorandum of association of a company can it be held that the said clause relates to an independent clause and empowers the appellant-company to carry on business of financiers or money-lenders. It is merely an ancillary power to give effect to the main objects of the company, that is to establish or finance subsidiary or associated companies for the manufacture of chemicals and allied products all over the world. Factually, the question of the said aspects of the object clause of the memorandum has been discussed with the Income-tax Officer by the appellant's representative, Mr. Gangadharan, as recorded in the assessment orders of the relevant assessment year which has been mentioned hereinbefore and, in fact, the then Income-tax Officer who may be said to be a competent and reasonable person had accepted the position and taxed the interest paid by the I.C.I India to the appellant during the relevant assessment year as “income from other sources “having regard to the nature of the agreement and transactions of the advance and loan by the appellant to its 100% subsidiary, the I.C.I (India) Ltd., for the purchase of the shares in the said three companies from time to time as hereinbefore stated and, in fact, the first notice dated September 23, 1968, issued by the Income-tax Officer under section 148 of the Income-tax Act, 1961, was issued without any reference to the memorandum and articles and world balance-sheet for the same amount of alleged escapement of profit which is also the subject-matter of the second notice dated May 20, 1970, which was issued after dropping the proceedings under the first notice on May 7, 1970. Therefore, on this aspect of the matter it is very difficult to hold that the second notice and subsequent notices had been issued in good faith and was not a mere pretence.

45. It cannot be ignored that the admitted facts are that various proceedings under section 52 of the Income-tax Act, 1961, for escapement of capital gains, for gift-tax as against the Indian subsidiary of the appellant and finally the impugned notices of escapement of assessment by issuing two successive notices under section 148 of the Income-tax Act, 1961, and the findings of the primary basic facts by the Tribunal which was affirmed by the Supreme Court as mentioned hereinbefore. In these circumstances and background it is very difficult to hold that the impugned notices were issued in good faith and are not mere pretences. A large number of decisions have been cited by both the parties on various aspects of the matter argued in this appeal. It would be enough to refer to some of the decisions where it has been laid down that the duty of the assessee does not, however, extend beyond a fair and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for the Income-tax Officer to decide what inference of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else, far less the assessee, to tell the assessing authority what inference, whether of facts or law, should be drawn. See Calcutta, Discount Co. Ltd. v. Income-tax Officer, [1961] 41 ITR 191, 201 (SC). Two conditions precedent are necessary to give power and jurisdiction to the Income-tax Officer to issue notice for reassessment under section 34 of the 1922 Income-tax Act and section 148 of the 1961 Act. There must be reasons to believe that income has escaped assessment, and the same has occurred due to—

(a) Omission or failure on the part of the assessee to make a return of income, or

(b) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year.

46. It is the duty of the assessee who wants the court to hold that the said jurisdiction was lacking, to establish that the Income-tax Officer had no material at all before him for believing that there had been such nondisclosure.

47. See pages 199 and 202 of [1961] 41 ITR.

48. The expression “reason to believe postulates belief and the existence of reasons for that belief”. The belief must be held in good faith it cannot be merely a pretence.

49. See page 210 of [1961] 41 ITR and also S. Narayanappa v. Commissioner of Income-tax, [1967] 63 ITR 219, 221 (SC).

50. It is now well settled that if the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34(1) of the 1922 Act which corresponds to Explanation 2 of section 147(a) of the 1961 Act also do not impose a more onerous obligation. Mere production of the books of account or other evidence from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34(1), now section 147(a). But where on the evidence and material produced the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous. If the assessee had disclosed his books of account and evidence from which material facts could be discovered it was under no obligation to inform the Income-tax Officer about the possible inferences which may be raised against him. It was for the Income-tax Officer to raise such an inference and if he did not do so the income which has escaped assessment cannot be brought to tax under section 34(1)(a) of the 1922 Act, now section 147(a) of the 1961 Act (see Commissioner Of Income Tax, Calcutta v. Burlop Dealers Ltd.† , [1971] 79 ITR 609 (SC)). In one of the latest Supreme Court decisions the jurisdiction of the Income-tax Officer to initiate proceedings under section 34(1)(a) of the 1922 Act, now section 147(a) of the 1961 Act, has been reiterated referring to all the relevant earlier decisions as follows:

Two conditions have to be satisfied. The first is that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax had been under-assessed; the second is that he must have reason to believe that such ‘under-assessment” had occurred by reason of either (1) omission or failure on the part of the assessee to make a return of his income under section 22; or (2) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. [See Commissioner of income-tax v. Gillanders Arbuthnot & Co., [1973] 87 ITR 407, 413, 414 (SC)].

51. The said decision has certain similarities to the proceeding under section 52 of the Income-tax Act, 1961, against the I.C.I (India) Ltd. wherein the transaction of transfer of the shares in the three companies to the appellant had been discussed. There also the question arose regarding transfer of shares by one company to another under an agreement between the said two companies and the questions for decision before the Supreme Court were: (1) whether proceedings initiated under section 34(1)(a) (1922 Act) are valid; (2) whether section 12B (1922 Act) is attracted to the facts of the cases; (3) if section 12B was attracted what was the amount of capital gains made. It may be pointed out that the said proceedings were under the 1922 Act and the corresponding sections of the 1961 Act are now section 147(a) and section 52. There the Supreme Court on the basis of the agreement held that the profit must be assessed according to the terms of the said agreement and not on the basis of difference between the market price and the value at which it is assessed. Dealing with the questions at pages 418, 419 of [1973] 87 ITR 407 (SC), Hegde J. observed as follows:

“Clause (1) of the agreement in specific terms says that ‘the existing partners shall sell and the company shall purchase the shares and securities for a sum of rupees seventy-five lakhs' Clause (3) of that agreement merely provides a mode of satisfaction of the sale price. The sale price fixed by the parties for the shares and the securities sold is Rs. 75 lakhs and nothing more. It may be that because of the allotment of the shares of the company in satisfaction of the sale price, the assessee-firm got certain benefits but that does not convert the sale into an exchange.

In Commissioner Of Income Tax, Kerala v. R.R Ramakrishna Pillai, [1967] 66 ITR 725 (SC), this court, distinguishing an exchange from a sale, observed that where the person carrying on the business, transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale and the true nature of the transaction will not be altered because for the purpose of stamp duty or other reasons the value of the assets transferred is shown as equivalent to the face value of the shares allotted. On the other hand a person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay the money consideration shares of certain face value shall be allotted to the transferor. In such a case, there are in truth two transactions, one transaction of sale and the other a contract under which the shares are accepted in satisfaction of the liability to pay the price. The fact that as a result of the transfer of the shares of the ‘company’ to the assessee-firm, the latter obtained considerable profits, will not alter the true nature of the transaction— see the decision of this court in Chittoor Motor Transport Co. (P.) Ltd. v. Income-tax Officer, [1966] 59 ITR 238 (SC).”

52. In this connection another latest decision of the Supreme Court in Commissioner of Income-tax v. Calcutta Discount Co. Ltd., [1973] 91 ITR 8; (1974) 3 SCC 260, may also be referred to where the assessee-company floated a subsidiary company and transferred to that subsidiary company various shares held by it. In return, the subsidiary company transferred to the assessee-company its shares of certain value as a result of which the assessee-company sustained a loss on the basis of the difference between the book value of the shares transferred by it to its subsidiary and the value of the shares of the subsidiary acquired by the assessee-company. The Income-tax Officer valued the shares transferred by the assessee-company to its subsidiary at the market rate and on that basis came to the conclusion that the assessee-company must be deemed to have made a profit of a certain amount. The head-notes of the said report have correctly set out the finding of the Supreme Court in that case which are as follows:

“Held, (i) the assessee and its subsidiary were two different legal entities. The transaction between the assessee and its subsidiary company Was a bona fide transaction and the assessee had not made any secret profits out of the transaction in question. Unless the Income-tax Officer, on the basis of material before him is able to come to the conclusion that the assessee had really made profits in the transaction, it is not permissible to him to add back to the assessee's return any fictional income.

(ii) In the absence of any evidence to show either that the sales were sham transactions or that market prices were in fact paid by the purchaser, the mere fact that the goods were sold at a concessional rate to benefit the purchaser at the expense of the company would not entitle the income-tax department to assess the difference between the market price and the price paid by the purchaser, as profits of the company. Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax, [1955] 28 ITR 952 (Mad) approved.

(iii) It may be that the assessee had transferred its valuable shares at cost price to its subsidiary in order to arrange its affairs as to reduce its tax burden. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction of taxing may not, except on peril of penalty, be violated; but it may lawfully be circumvented. Commissioner Of Income Tax, Gujarat v. A. Raman & C., [1968] 67 ITR 11 (SC) followed.

(iv) If the assessee in this case has arranged its affairs in such a manner as to reduce its tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus forgoing part of its own profits and at the same time enabling its subsidiary to earn some profits, such a course is not impermissible under law. Sharkey (Inspector of Taxes) v. Wernher, [1956] 29 ITR 962 (HL) and Dooar's Tea Co. Ltd. v. Commissioner of Agricultural Income-tax, [1962] 44 ITR 6 (SC) distinguished. Appeal dismissed.”

53. The principle laid down in the said Supreme Court decision seems to apply with equal force to the transaction which is involved in the present appeal as admittedly there is no question, that the transaction between the appellant and its subsidiary, I.C.I (India) Ltd., regarding the transfer of the shares of the said three companies as per agreement and arrangement as stated above was not bona fide or was sham transaction. And it is now well settled that an assessee may lawfully arrange its matters in such a way as to get tax benefits if it has acted lawfully without violation of any provision of a taxing statute. That is exactly what has happened in this case, as all the transactions are above board, clearly disclosed to the income-tax authorities by producing all relevant records and documents including the memorandum and articles of association and the correspondence, particularly the declaration of intention dated the 5th of November, 1953, and the primary nature of the transaction has been determined by the Tribunal and confirmed by the Supreme Court in the said section 52 proceeding which has been referred to earlier. It would also be useful for referring to another recent Supreme Court decision in Commissioner Of Wealth Tax, Madras v. Spencer & Co. Ltd., (1973) 4 SCC 204; [1973] 88 ITR 429, where the facts and the decision of the Supreme Court have been correctly summarised in the head-notes of the said report which are as follows:

“Respondent was a public limited company carrying on business of store-keepers, commission agents, retailers, manufacturers, hotel-keepers and catering service in South India. Another company, M/s. G.F Kellners & Co., were railway caterers in North India. In 1929, the respondent-company acquired 1,59,924 preference shares out of 1,60,000 preference shares and 1,99,948 equity shares out of 2,00,000 enquity shares of Kellners. The acquisition was done partly for cash and partly in lieu of shares of the respondent-company issued to the shareholders of Kellners. In 1930, the respondent company acquired all the assets and goodwill of Kellners for Rs. 31,26,000. Part of the consideration was to be paid in cash on demand by Kellners. One of the terms of the agreement was that in the event of Kellners going into voluntary liquidation, the respondent-company will have to surrender to the liquidators its shareholding in Kellners to the extent of Rs. 31,26,000 or any part thereof remaining unpaid. The question was whether Rs. 31,26,000 was a ‘debt’ due from the assessee within the meaning of section 2(m):

Held, it is true that the assessee had a controlling interest in Kellners but that does not, in law, make Kellners part of the assessee-company. The Kellners and the assessee-company are two different legal entities. It is not denied that in respect of the assets purchased by the assessee from Kellners the assessee had not paid a part of the consideration, i.e, Rs. 31,26,000. Prima facie, that part of the consideration is a debt due from the assessee to the Kellners. The fact that under certain circumstances the assessee, instead of paying back the debt in cash, could discharge the same by transfer of shares does not change the character of the liability. The mode of discharging a liability does not change its true character.

Spencer & Co. v. Commissioner of Wealth-tax, [1969] 72 ITR 33 (Mad) affirmed. Appeal dismissed.”

54. One of the questions argued by Dr. Pal, on behalf of the appellant is that a second notice under section 148 of the Income-tax Act, as purported to have been done in this case after dropping the first notice, is not permissible as that would enable the income-tax authorities to circumvent the limitation of four years within which such reassessment has to be completed under section 153(2)(a) of the Income-tax Act, 1961. The said contention raised by Dr. Pal seems to be attractive and has some force. But, having regard to the fact that the second notice was issued within the period of four years after dropping the first one, the question becomes wholly unnecessary for the purpose of deciding this appeal.

55. Therefore, in the facts and circumstances of this; case as discussed above, from all the above decisions and the principles laid down and the provisions of the relevant sections if applied, it must be held that the impugned notides were not issued in good faith and were mere pretences.

56. This appeal is, therefore, allowed. The rule is made absolute. The impugned notices are set aside. Let appropriate writs be issued. There will be no order as to costs.

Sankar Prasad Mitra, C.J:— I agree.

Appeal from Original Order No. 322 of 1973

Imperial Chemical Industries Ltd. v. Income-Tax Officer

Structured Summary of the Opinion delivered by Salil K. Roy Chowdhury, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent's (Revenue) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Imperial Chemical Industries Ltd. v. Income-Tax Officer

Comments