Chunnilal Onkarmal (Pvt.) Ltd. v. Income-Tax Officer, A Ward, Indore, And Others.

1. This is a petition under arts. 226 and 227 of the Constitution.

2. The material facts, as set out in the petition, briefly are as follows :

Hukumchand Mills Ltd., Indore, which had been granted by the Hukum-chand Mills Ltd. to the said firm for a period of five years. Under the terms of the agreement granting the sole selling agency to the firm, the firm had deposited a sum of Rs. 26 lakhs with the mills-company at the interest of 41/2 per annum. This amount was contributed by the partners of the firm. The mills-company, however, prematurely terminated the sole selling agency agreement on January 11, 1958, and as a consequence thereof the aforesaid partnership firm stood dissolved with effect from January 11, 1958, in accordance with the terms of the partnership agreement. The firm was assessed to income-tax in the status of a registered firm for the assessment years 1957-58 and 1958-59. For the assessment year 1959-60, the firm was assessed for a period from January 1, 1958, to January 11, 1958, only as the firm stood dissolved on January 11, 1958.

3. Respondent No. 4 instituted a suit against the mills-company for the refund of deposits, for recovery of interest thereon and for damages for wrongful termination of the sole selling agency agreement, impleading the petitioner and respondent No. 5. Respondent No. 4 also instituted another suit against the petitioner and respondent No. 5 for a dissolution of the partnership and accounts. Both these suits were decreed by the Additional District Judge, Indore, on February 12, 1970. An appeal was preferred against the decree passed by the Additional District Judge, Indore, in the suit instituted by respondent No. 4 against the mills-company. The appeal was disposed of in terms of a compromise arrived at between the parties. By the decree passed in terms of the compromise, the mills-company was required to pay a sum of Rs. 46 lakhs on account of deposits and interest due, but it was not liable to pay any damages for the termination of the sole selling agency agreement. In pursuance of the compromise decree, the deposits made by the firm were allocated, with the consent of parties, by a break-up pro rata among the ex-partners, and in accordance with the terms of the compromise, a sum of Rs. 23 lakhs was payable to respondent No. 4 and a sum of Rs. 17,25,000 was payable to the petitioner and the remaining amount of Rs. 5,75,000 was payable to respondent No. 5.

4. During the pendency of the litigation, respondent No. 4 had offered the income from interest on deposits in their assessments to income-tax on the basis of accrual from year to year. The petitioner, on the other hand, appended a note to their returns filed in the relevant years, stating that the claims were in dispute and, as such, there was not even an accrued income.

5. For the assessment year 1973-74, relevant to the previous year in which the consent decree was passed as aforesaid, the petitioner filed its return on August 15, 1973, wherein it offered the entire income of its share. In the course of the assessment proceedings, enquiries were made by the ITO regarding the circumstances leading to the termination of the sole selling agency agreement, the dissolution of the firm, the litigation in the court, the consent decree passed and whether the income had accrued to the partners individually or to the dissolved firm. These queries were answered by the petitioner in the course of hearing and all necessary material and documents bearing on the said queries were placed before the ITO.

6. The ITO in the meanwhile issued a notice dated December 1, 1975, to the firm under Section 148 of the Act stating that the income in respect of which the firm was chargeable to tax for the assessment year 1973-74 had escaped assessment and that he proposed to assess the said income. The notice was served on the petitioner as a partner of the firm. In response to the notice, the petitioner's representative appeared and submitted before the ITO that he had no jurisdiction to assess the firm as the firm had already been dissolved with effect from January 11, 1958, and, thereafter, the firm had no income whatsoever in the assessment year 1973-74.

7. Proceedings for the assessment of the petitioner for the assessment year 1973-74 and the proceedings commenced in pursuance of the notice under Section 148 of the Act, issued to the dissolved firm, were going on simultaneously, in the course of which a full enquiry was held and at the conclusion of proceedings, respondent No. 1, on March 20, 1976, passed an order in respect of the assessment of the petitioner for the assessment year 1973-74. The ITO held that out of the total amount Rs, 17,25,000 received by the petitioner under the consent decree passed by the High Court, whatever amount was received by the petitioner over and above its capital contribution was in the nature of interest and as the said interest had become payable to the petitioner in the year of assessment by virtue of the consent decree, it was rightly offered to tax. The petitioner was, accordingly, assessed to tax. In the proceedings commenced against the dissolved firm under Section 148 of the Act, respondent No. 1, by his order dated March 26, 1976, held that the firm automatically stood dissolved the moment the selling agency agreement was terminated, as provided by the terms of the partnership deed, and the firm was, therefore, not in existence after January 11, 1958. The ITO further held that the amounts awarded under the consent decree were awarded directly to each partner individually and there was no income left that could be attributed to the dissolved firm. The ITO, therefore, closed the proceedings under Section 148 of the Act.

8. Subsequently, the ITO again issued a notice dated March 9, 1978, under Section 148 of the Act to the petitioner. In that notice, it was stated that the ITO had reason to believe that income in respect of which the petitioner was chargeable to tax for the assessment year 1973-74 had escaped assessment, and the petitioner was required to deliver, within thirty days of the service of notice, a return in the prescribed form. It is this notice that has been assailed by the petitioner in this petition.

9. In the return filed by respondents Nos. 1 to 3, it was stated that the notice was issued to the petitioner as the ITO had reason to believe that by reason of the failure of the AOP, constituted by the partners of the firm, to make a return and to disclose fully all material facts, income chargeable to tax had escaped assessment. A copy of the note recording reasons by the ITO for issuing the notice, which is annexed to the return, is as follows:

" M/s. Sir Hukumchand & Mannalal is a firm consisting of 3 partners. On termination of the sole selling agency, the following compensation was awarded to the parties as per High Court Order as under.

Name Shave Amount (Rs.)

1) M/s. Swarupchand Hukumchand Pvt. Ltd.

8 annas 23,00,000

2) M/s. Chunnilal Onkarmal Pvt. Ltd.

6 annas 17,25,000

3) Shri Ratanlal Ramkumar MorarKa 2 annas 5,75,000 Total 46,00,000 The abovesaid compensation falls in the A.Y. 73-74. The same has escaped assessment. Issue notices under Section 148, read with Section 147(a) in the status of AOP (as per CIT's letter No. 263(120)/77/78 dt. 4-3-78) to above-mentioned 3 partners."

Shri Chaphekar, learned counsel for the petitioner, contended that the impugned notice was void and without jurisdiction. It was contended that the question about the nature of the amount received by the petitioner under the consent decree and whether the amount awarded under the consent decree constituted income of the firm or the partner, was fully considered in the course of the assessment of the petitioner for the assessment year 1973-74. It was urged that all the primary facts necessary to decide the said question were fully and truly disclosed by the petitioner to respondent No. 1, and since there was no new material or information coming to the knowledge of respondent No. 1, he had no jurisdiction to issue a notice under Section 148 of the Act. Learned counsel further contended that according to the return filed on behalf of respondents Nos. 1 to 3, it was clear that the notice was issued by respondent No. 1 as directed by the Commissioner by his letter dated March 4, 1978, and not on the basis of the satisfaction of the ITO. It was, therefore, urged that the impugned notice deserved to be quashed.

10. Having heard learned counsel for the parties, we have come to the conclusion that this petition deserves to be allowed. In Modi Spg. & Wvg. Mills Co. Ltd. v. ITO [1970] 75 ITR 367, the Supreme Court, while considering the scope of Section 34 of the Indian I.T. Act, 1922, similar to Section 147 of the Act, observed as follows (p. 371):

" Section 34 confers jurisdiction upon the Income-tax Officer to issue a notice in respect of the assessment beyond the period of four years, but within a period of eight years, from the end of the relevant year, if two conditions exist--(1) that the Income-tax Officer has reason to believe that income, profits or gains chargeable to income-tax had been under-assessed ; and (2) that he has also reason to believe that such under-assessment had occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year. These conditions are cumulative and precedent to the exercise of jurisdiction to issue a notice of reassessment: Calcutta. Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta[1961] 41 ITR 191 (SC)."

Now, in the instant case, the impugned notice has been issued to the petitioner because of the alleged omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The question then arises as to what has been the omission or failure on the part of the assessee to make a full and true disclosure. There is nothing before us to show that in the return filed by the petitioner, the particulars given were not correct or that the assessee had failed to disclose any fact material for its assessment. In the note of the ITO reciting reasons for issuing the impugned notice, the ITO has not disclosed any material on the basis of which he had arrived at the belief that, by reason of the omission or failure on the part of the petitioner to disclose fully an$ truly any particular fact necessary for the assessment of the petitioner, income had escaped assessment. In fact, the note does not even record the existence of the belief of the ITO. It seems that, as recorded in the note, the notice under Section 148 of the Act was issued to the petitioner by the ITO because he was directed to do so by the Commissioner by letter dated March 4, 1978 (annex. R-2), the material portion of which is as follows:

Please refer to your proposals under section 263 dated 14-2-1978 in the above case. After careful consideration, the case has not been found fit for action under section 263 by the CIT and the proposals have been filed. However, immediate action should be taken under Section 147 for the assessment year 1973-74, treating the three parties (who have received the sum of Rs. 46 lakhs) in the status of ' AOP or body of individuals whether incorporated or not'.

There is thus no material whatsoever for holding that there was any failure or omission on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment as a result of which income chargeable to tax had escaped assessment and that the ITO had formed any belief in that behalf. It is well settled that unless the requirements of clause (a) or clause (b) of section 147 are satisfied, the ITO has no jurisdiction to issue a notice under Section 148 of the Act. Learned counsel for the Department was unable to support the action of the ITO. The impugned notice, therefore, deserves to be quashed.

11. For all these reasons, this petition is allowed with costs. The notice dated March 9, 1978 (annex. J), and the proceedings commenced in that behalf are quashed. Counsel's fee Rs. 200 (two hundred), if certified; security deposit shall be refunded.