K.C. Saigal vs R.P. Sehgal

S. Ranganathan, J.—Sri K.C. Saigal (the petitioner in CW No. 127 of 1976) is the proprietor of a business, carried on in the name and style of Interocean Shipping Co., as charterers and shipping brokers for the chartering committee of the Ministry of Shipping and Transport of the Government of India, a number of Indian shipping companies and others. He was also a partner of a firm known as Eastern Bulk Services carrying on a like business (which has been since dissolved), the other partners being J.M. Saigal and Mrs. Sawitri Malhotra. This firm and its partners are the petitioners in CW No. 128 of 1976. The two businesses had their office at 98, Tolstoy Marg, New Delhi. On the basis of a warrant of authorisation issued by the Commissioner on 11-9-1975, certain searches were conducted in the business premises of the concerns, the residences of the three persons mentioned above and also those of some of their relatives on the 17-9-1975. These searches were conducted under the provisions of section 132 of the income tax Act, 1961 (''the Act''). The details of these searches and the proceedings that followed are not relevant for our present purposes. Eventually, on 15-12-1975, the ITO dealing with the assessments of the two concerns, passed an order u/s 132(5) in each-of the cases. In the case of K.C. Saigal, he held that a sum of Rs. 15,85,914 derived as commission on freight and pertaining to the ten assessment years from 1966-67 to 1975-76 had been concealed by the assessee and that the assessee had also concealed income of Rs. 1,000 derived by way of commission on demurrage in each of these years. In the case of the other firm, he held that there was concealed income of Rs. 23,72,529 by way of commission on freight and of Rs. 37,500 by way of commission on demurrage which pertained to the seven assessment years from 1969-70 to 1975-76. Under the scheme of the Act, this was only a tentative order, subject to the outcome of normal proceedings or reassessment proceedings initiated or to be initiated under the Act. Such reassessment proceedings were initiated by the ITO concerned by the issue of notices u/s 148 of the Act seeking to reopen the assessments that had been made earlier on the two assessees. These notices were issued on 6-12-1975 for the assessment years 1967-68 to 1972-73 in the case of K.C. Saigal and the assessment years 1969-70 to 1974-75 in the case of Eastern Bulk Carriers. In the former case, the reassessment proceedings were initiated only in respect of six out of the ten assessment years earlier referred to, perhaps because action u/s 148 for the assessment year 1966-67 was barred by time and the original assessment proceedings for the assessment years 1973-74 to 1975-76 were still pending. The assessees thereupon filed CW Nos. 127 and 128 of 1976 seeking the issue of writs of certiorari quashing the two orders passed u/s 132(5). There was also a prayer in the writ petition that the notices u/s 148 had been issued without jurisdiction and should be quashed. On 9-2-1976, this Court directed the issue of notices to the respondents to show cause why the writ petitions should not be admitted and also ordered interim stay of further proceedings in pursuance of the notices issued u/s 148. On 9-8-1976 the writ petitions were admitted and the interim stay was made absolute. The two writ petitions came on for hearing some time in 1980. By this time, there had been certain developments. The assessees had presented applications u/s 132(11) to the CBDT against the orders u/s 132(5). In these applications it had been emphasised, inter alia, that "rule 112A read with section 132(5) of the Act, does not confer any jurisdiction on the ITO to work out the assessee''s concealed income when no valuable assets has (sic) been seized and retained by the income tax Department". This contention was accepted by the Board which held, as follows, by its orders dated 21-5-1976. We quote from one of the two orders to the same effect passed in the two cases:

I agree with the assessee that the order u/s 132(5) has now turned to be an exercise in futility in view of the fact that the income tax Officer does not have in his possession any valuable asset like cash, jewellery, etc., belonging to it. It is not necessary for me to go into the dispute between the income tax Officer and the assessee, regarding the assessee''s method of accounting and the income tax Officer''s computation of the undisclosed income. These are issues which have to be considered by the income tax Officer in the relevant assessments, after giving adequate opportunity to the assessee to rebut his inferences and the materials on which he proposes to rely. If the assessee is aggrieved with the income tax Officer''s findings or in the assessments, when they are finalized, his remedy will lie in appeals before the Appellate Assistant Commissioner and the Appellate Tribunal in the ordinary course. These are matters which are outside the purview of section 132(12) and for agitating which other courses are specifically prescribed in the income tax Act.

In the circumstances of the case, I hold that the assessee''s application u/s 132(11) has become infructuous and file it accordingly. This is without prejudice to the income tax Officer''s taking any action which he may consider necessary in connection with the relevant assessments and the assessee''s pursuing appropriate remedies as provided in the income tax Act, after the completion of the assessments, if the assessments are not acceptable to it.

The result was that the orders u/s 132(5) that had been challenged initially in the two writ petitions had become ineffective and no relief from this Court was necessary any longer. The main prayers in the two writ petitions had thus become infructuous. It was, however, urged that the petitioners'' challenge to the initiation of proceedings u/s 148 still survived and needed to be gone into. But, as there were such notices in respect of several years and as the averments and facts relevant for a decision on that question might be somewhat different for different years, it was suggested to the petitioners that they should, if so advised, file separate writ petitions in regard to the reliefs still sought for in respect of each of the years. That is how CW Nos. 493 to 502 of 1980 seem to have been filed and are before us. From the facts set out above, it will be clear that the common question agitated in all these twelve writ petitions pertains to the validity of the initiation of proceedings against the petitioners u/s 148.

The short point taken by the respondents is that the action u/s 148 was justified because the papers and documents seized in the course of the searches clearly showed:

(a) that the assessees had not disclosed in full the commission earned by it on freight; and

(b) that the assessees had totally omitted to disclose the commission on demurrage earned by them. If these allegations are correct, then, clearly there is enough justification to uphold the initiation of the reassessment proceedings and leave the assessees to contest the matter on the merits in regular appeals preferred under the Act. It has been brought to our; notice that the two assessees have, in sub-sequent years (1972-73 to 1977-78 in the case of K.C. Saigal and 1975-76 to 1977-78 in the case of Eastern Bulk Services) preferred) appeals or revisions and obtained relief to some extent at the hands of the appellate/revisional authorities. We have, however, to examine in these writ petitions a very limited question as to whether the ITO had information on which he had reason to believe that the income of the assessee chargeable to tax had escaped assessment. The notices u/s 148 were issued on 6-12-1975 and it is enough for the respondents to show that the above condition is fulfilled in regard to the assessment years 1971-72 to 1975-76; However, in regard to the assessment years 1967-68 to 1970-71, it is also necessary for the respondent to show that there was reason to believe that the above escapement was by reason of the omission or failure on the part of the assessees to disclose fully or truly the material facts necessary for their assessments for the above assessment years.

It is not disputed by the Eastern Bulk Carriers that the total commission on freight actually earned by it between 1-4-1968 and till 31-3-1975 was Rs. 36,12,576 but that only Rs. 12,41,047 had been disclosed in the returns up to the assessment year 1975-76 thus leaving an unassessed balance of Rs. 23,72,529 (sic). Similarly, in the case of K.C. Saigal, the commission earned by the assessee up to 31-3-1975 was Rs. 40,43,300 whereas the commission returned for assessment in respect of that period came only to Rs. 24,57,383 thus leaving an unassessed balance of Rs. 15,85,919 (sic). The assessee''s case, however, is that there is no escapement of any income from assessment. According to the assessee, the commission income had been returned by the assessee on actual receipt basis consistently; the assessee, it was said, was consistently following the method, in the maintenance of its accounts, of crediting commission only when received, i.e., on cash basis though it was claiming expenditure on accrual basis. It is stated that since the entire accrued commission, would be shown, in subsequent years, as and when actually received, there was and could be no question of any concealment or escapement of income. It is said that,. in some assessment years the assessees had, on this basis, returned a larger commission income than had been actually earned on an accrual basis during the relevant previous years. It is urged that the respondent had no jurisdiction to initiate action u/s 148 to change the method of accounting adopted and accepted consistently over several years. It was also specifically alleged that this method of accounting (under which the commission is credited only when received but expenses are debited on accrual basis) had been ''mentioned in every return of income filed by the petitioner so far and this method has been accepted by the first respondent''. This last allegation of fact has been refuted by the respondents in their counter-affidavits. It was categorically stated that the system of accounting followed by the petitioner was never mentioned ''in the return of income or in the statement of assessable income accompanying the return''. It was further denied that any such method, as is claimed to have been followed by the petitioner, was a system of accounting known to the commercial world. It was alleged that it was not a system of accounting at all but a device whereby the assessee showed the actual receipts and deducted there from all expenditure for liabilities incurred, whether paid out in fact or not. Apart from the fact that this was not a proper method of accounting, it is urged, this was a case in which the primary facts and materials were not disclosed to the ITO.

The petitioners have annexed to the writ petitions some of the relevant documents and the counsel for the respondents has also produced some of the relevant records. We have examined these and may record here the position we found in respect of the several assessment years:

The method of accounting finds a place for the first time only in the returns of income filed by the assessees for the assessment year 1972-73. This is shown in the column on page 6 of the returns which reads: ''Method of accounting'' and indicates there against three descriptions ''mercantile/cash/mixed'' out of which the assessee had to strike out whichever was not applicable. The words ''mercantile'' and ''cash'' were struck out, the word ''mixed'' was also written in ink. These returns were filed some time in July/August 1973. The counsel for the petitioner states that the column for the ''method of accounting'' was introduced into the return only at about this time and that, earlier, there was no place in the return at which the assessee could make mention of the method of accounting.

In the case of K.C. Saigal, the profit and loss account refers to commission receipts of Rs. 87,014.90. The balance sheet shows ''current liabilities and provisions'' in respect of certain items of expenses. In the original assessment order dated 20-3-1971 the ITO refers to commission received through banks for which certificates were filed and expenses actually incurred. This was for the assessment year 1967-68. For the assessment year 1968-69, the balance sheet shows provisions on the liabilities side as well as amounts due on the assets side. The profit and loss account shows ''commission receipts'' and ''interest earned''. The assessment order gives no relevant indication. The balance sheet for the year 31-3-1969, relevant for the assessment year 1969-70 is similar to that of the earlier year. The profit and loss account refers to commission earned'' and refers to provisions on the expenditure side. The assessment order is not helpful. For the assessment year 1970-71, the balance sheet is on the same tines as before and the profit and loss account refers to ''commission earned, agency and service charges, interest''. The assessment order throws no light. The same is the position in regard to the assessment year 1971-72. For 1972-73, however, as already stated, the return makes mention of the ''mixed'' method of accounting.

In the case of Eastern Bulk Services, the profit and loss account for the year 31-3-1969 refers to ''commission earned'', but the balance sheet refers to ''provisions''. The assessment order makes reference to ''commission receipts'' from the foreign principals of the same name. For the assessment year 1970-71, the balance sheet shows on the assets side amounts ''due'' and the profit and loss account finds a mention of ''commission earned'' and ''interest received'' as well as ''interest accrued''. The assessment order does not touch the issue at all. In the profit and loss account for the assessment year 1971-72, there is a reference to ''commission earned'' and to ''interest''. The balance sheet contains some provisions against expenses. The assessment order makes no reference to the method of accounting. For 1972-73, as already mentioned, the return describes the method of accounting. A letter sent soon after also refers to commission received from correspondents as per brokers'' certificates enclosed. For the assessment year 1973-74, the profit and loss account refers to ''commission earned'' and the balance sheet refers to amounts due other than commission as well as provisions for liabilities. The assessment order does not refer to the method of accounting but refers to ''commission receipts''. The return, however, is not before us and it is not known whether the method of accounting was mentioned or not therein. The same is the position in regard to the assessment year 1974-75 as well.

In regard to the assessment year 1975-76 in the case of Eastern Bulk Carriers, the respondents have stated that the assessee had not accounted for a commission of $ 1,667.50 which it had received from its correspondents on 9-10-1974 in respect of the charter of the ship ''Jagat Padmini''. The petitioner states in the rejoinder that it had received no such cheque and that on subsequent verification it has been discovered that the cheque, though sent by the correspondents, had not been received by the assessee and that, after correspondence with the concerned parties, the assessee has obtained a fresh cheque for the amount in question.

In regard to the escapement of amounts of commission in respect of demurrage, the respondents state that the seized documents showed that the assessee was entitled to commission even on demurrage. When called upon to furnish the details of the assessee''s share thereof as per the terms of the charter party and fixtures, in K.C. Saigal''s case, the assessee himself had admitted in its letter dated 12-12-1975 the receipt of commission on demurrage when the amount thereof was not small. A sum of Rs. 4,930 towards his share of such commission had also been accounted for by the assessee ''for the year 1973-74 onwards up to 31-3-1975''. But no such commission in respect of the period prior to 1973-74 had been returned.

On a perusal of the materials placed before us, we have come to the conclusion that these writ petitions should be dismissed on the short ground that no case for our intervention at the stage of the issue of the notices u/s 148 and for the issue of a writ quashing the notices as being without jurisdiction, has been made out. Prima facie, on the material before us there is nothing to indicate that the assessees had disclosed to the ITO till the assessment year 1972-73 that they were following a hybrid system of accounting and that only the commission actually received was being shown. If this material fact necessary for making the assessment for these years was not before the ITO, there would be clear justification for the ITO, when he came to know from the papers seized -during the searches that the assessees had earned much larger commission up to 31-3-1975 than had been accounted for in the returns, to initiate action u/s 148. On the other hand, in some years the balance sheet and profit and loss account clearly gave the impression that the commission was being returned on ''earnings'' or ''accrual'' basis. For the assessment year 1972-73, in the case of both the assessees, the returns contained for the first time, a specific reference to the method of accounting as ''mixed''. For the subsequent years, the exact position is not known as the relevant returns are not before us. But for these years the reassessments have been initiated within the period of four years permitted u/s 147(b) of the Act. It is well settled that the ITO can initiate proceedings u/s 147(b) even in cases where the failure to make a proper assessment originally was due entirely to oversight or, inadvertence on the part of the taxing authorities- Maharajadhiraj Sir Kameshwar Singh Vs. The State of Bihar, . Thus, even though the method of accounting may have been referred to in the forms of return, the ITO did not have any occasion to advert to or consider the disparity between the commission earned and received and so did not address himself to a proper basis of assessment in the light of this fact, which he discovered subsequently. If the ITO had been conscious of the significance of the method of accounting and computed the original assessments accepting the same, then it could be said that he cannot initiate proceedings u/s 148 for merely changing his earlier opinion about the acceptability of the system of accounting. But where there is nothing to show that the ITO ever addressed himself to this aspect and where the significance of the method of accounting alleged to have been adopted arises for consideration for the first time only in the context of the discoveries made in the course of the searches, action u/s 147(b) was fully justified.

We are, in the circumstances, not satisfied that the issue of the notices u/s 147 were wholly without jurisdiction as contended for by the petitioners and we, therefore, dismiss these petitions. We would, however, like to clarify that the question whether the facts and circumstances justify action u/s 147 is primarily a question of fact to be decided on an investigation of all the facts available on the record including those made available at the time of original assessments. On a consideration of the limited facts placed before us, we have arrived at a conclusion which is sufficient to dismiss these writ petitions. However, in the interests of justice, we would like to clarify that the dismissal of these petitions will not stand in the way of the petitioners adducing any other or further material that may be available on record and satisfying (if they can) the ITO and the other appellate authorities in the course of reassessment proceedings and appeals there from that the initiation of action u/s 147 for these years was not justified in the circumstances. In other words, though we are dismissing the writ petitions, we leave it open to the assessees to place all relevant facts and raise all the contentions before the taxing authorities that would have been open to them in the course of reassessment proceedings and appeals there-from, had they agitated those matters in the regular proceedings under the Act without approaching this Court under the special jurisdiction of article 226 of the Constitution, We also express no opinion regarding the merits of the reassessments that may be made and the acceptability or otherwise of the hybrid method of accounting said to have been employed by the assessees which is also claimed to have been accepted by the AAC and the Commissioner in some subsequent years. With these observations and for the reasons discussed above, the writ petitions are dismissed with the costs of the respondents. Counsel''s fee, one set, Rs, 500.