JUDGMENT
1. Heard both sides at length. Perused the petition, affidavit-in-reply and the rejoinder tendered today in court on behalf of the petitioner.
2. The petitioner by this petition filed under Article 226 of the Constitution of India is praying to quash and set aside the notice dated March 17, 2000, issued by respondent No. 1 under Section 148 of the Income-tax Act, 1961.
The said notice alleges that income chargeable to tax for the assessment year 1991-92 had escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961.
3. The petitioner is a body corporate incorporated in the United States of America and carries on banking business in India.
4. It is contended by learned counsel for the petitioner that there was no omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment in the relevant assessment year. He has further contended that all primary facts were disclosed by the petitioner in the return and the Income-tax Officer could have asked for further details and that failure on the part of the officer to investigate into the matter further cannot be equated with omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. In support of his submission, he invited our attention to the assessment order passed by respondent No. 1 for the assessment year 1991-92. It is contended that the jurisdictional facts are absent for issuing such notice under Section 148.
5. Affidavit-in-reply has been filed by the Revenue pointing out the reasons for reopening the assessment. It is stated that the reasons came to be recorded and the Commissioner of Income-tax, Mumbai City-III, Mumbai, has granted sanction under Section 151 of the Income-tax Act. Those reasons are annexed and relied upon. It has been pointed out that the statutory requirements are complied with in issuing the said notice. It is denied that there was true and full disclosure and there was reason to believe for respondent No. 1 that income has escaped assessment.
6. In view of the contentions raised, the question that arises for our consideration is whether respondent No. 1 had reason to believe that the income which was chargeable to tax had been underassessed or escaped assessment and there was reason to believe that such escape of assessment was caused by reason of the assessee's failure to disclose fully and truly all material facts necessary for the assessment year 1991-92.
7. We may note at the outset the provisions of Section 147 of the Act and the judgments cited by the parlies.
8. Section 147 reads as under :
"147. Income escaping assessment, --If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year) :
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
Explanation 1.--Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.--For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely : --
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ;
(c) where an assessment has been made, but-
(i) income chargeable to tax has been underassessed ; or
(ii) such income has been assessed at too low a rate ; or
(iii) such income has been made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed."
9. Learned counsel for the petitioner drew our attention to various observations made in the assessment order for the assessment year 1991-92. In our opinion, they only indicate how the Portfolio Management Scheme (PMS) was to be operated by a bank. How the petitioner violated the guidelines given by the Reserve Bank of India for operating such accounts. The petitioner treated PMS accounts of its clients as fixed deposits. This included four PMS accounts of Grasim Industries Ltd. and the petitioner paid fixed interest violating the rules of the Reserve Bank of India for fixed deposits. Hence, the amount of Rs. 57.77 was not allowed as expenses for that year.
10. The reasons noted for reopening of the assessment show that the assessee-bank under the PMS received money from various customers including Grasim Industries Ltd. Guidelines for acceptance of funds under the PMS were issued from time to time by the Reserve Bank of India. Under the Scheme, money has to be placed by the customer for a certain period of time and the money was required to be invested in shares, debentures, public sector bonds, securities, etc. The said investment was made for and on behalf of the customers. The role of the bank was purely custodial and managerial and it was only to earn commission/service charges/fees for conducting the activity of managing the PMS on behalf of its customers. The issue of PMS was discussed in the assessment order for the assessment year 1991-92 of the assessee. The funds invested in PMS by various clients have been held as deposits. If is then observed as follows :
"4. Grasim Industries Ltd. has placed funds in four PMS accounts with the Citibank. On such investments it is reported to have earned certain fixed returns. Grasim Industries has contended that there was an oral understanding with the Citibank of receiving fixed return at 18 per cent, interest on the funds invested in the Citibank under its Portfolio Management Scheme. As a matter of fact, the return received on the basis of the information available with the Department, particularly in respect of the assessment year 1992-93, the fixed return theory appears to be correct and credible. In fact, for the subsequent year, Grasim Industries Ltd. has furnished certain copies of correspondence made with the Citibank before its Assessing Officer. The fixed return theory is in contravention of the letter and spirit of PMS under which the role of the bank was purely custodial and managerial which a commission/fee was to be earned.
5. It is the contention of Grasim Industries Ltd. that the income earned over and above the fixed return, has not been passed on to it and it has been retained and enjoyed by the Citibank. In fact, a script-wise analysis of the transaction in the PMS account for the financial year ending March 31, 1991, reveals that an amount of Rs. 40,23,45,387 was earned on such transactions. This has not been shown either by the Citibank or by Grasim Industries Ltd. in its return for the assessment year 1991-92. The sum of Rs. 40,23,45,387 earned on transactions in the PMS account has escaped assessment in the case of the bank."
11. Thus, it is clear that there was an oral understanding between Grasim Industries Ltd. and the petitioner-assessee-bank which became clear from the assessment proceedings of Grasim Industries Ltd. It showed that an amount of Rs. 40,23,45,387 was earned by the petitioner over and above the amount paid to Grasim Industries. Because of the said oral understanding, the asses-see-bank only paid a fixed return at the rate of 18 per cent, interest under the said Portfolio Management Scheme to Grasim Industries Ltd. and retained the amount of Rs. 40,23,45,387 which was earned in excess of the same in those accounts.
12. Learned counsel for the petitioner relied upon the judgment of the apex court reported in Gemini Leather Stores v. ITO [1975] 100 ITR 1. In proceedings for the original assessment of the assessee-firm, though the assessee did not disclose certain transactions evidenced by certain drafts, the officer himself discovered the facts relating thereto, but did not bring the amounts represented by the drafts to tax as the income of the assessee. Subsequently, notice came to be issued under Section 148 read with Section 147(a) of the Income-tax Act, 1961. The apex court held that after discovery of the primary facts relating to the transactions evidenced by the drafts it was for the officer to make the necessary enquiries and draw proper inference as to whether the amounts represented by the drafts could be treated as part of the total income of the assessee. This was because all primary facts were in his possession. This has not been done by the officer and it was plainly a case of oversight and it could not be said that income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts.
13. Learned counsel for the petitioner next relied upon the judgment of the apex court reported in Indian Oil Corporation v. ITO [1986] 159 ITR 956. In the said case, the Assam Oil Company, the assessee, whose assets and liabilities later vested in the Indian Oil Corporation, was a company incorporated in the U.K. It had its principal place of business in Digboi in Assam and carried on business in oils and lubricants. From the assessment year 1951-52 onwards, every year the assessee claimed deduction of certain expenses amounting to about 1,00,000 or above as administrative charges incurred by the Burmah Oil Co. of London for management and secretarial work carried out on behalf of the assessee in London. It represented approximately 40 per cent, of the total composite management expenses of Burmah Oil Co. incurred. In the assessment proceedings, the Income-tax Officer elicited information regarding the management expenses, but ultimately allowed the deduction as claimed. For the assessment year 1954-55, though the officer called for an auditor's report regarding the reasonableness of the expenses and had considered disallowing a part of the expenses, he finally allowed the claim without waiting for the auditor's report. Assessments were also made similarly for 1955-56 to 1959-60. For the assessment year 1963-64, a certificate from the London auditors revealed that the reasonable administrative expenses incurred by Burmah Oil Co. was about 10 per cent. Thereafter, the assessment came to be reopened under Section 147(a) of the Income-tax Act, 1961. It was held that the assessee had all along disclosed and the Revenue was aware that London management expenses were incurred on behalf of the assessee by the Burmah Oil Co. who were managing the affairs and doing certain works for the assessee as well as certain allied companies. The nature and quantum of work done was disclosed. The expenses claimed whether excessive or not was an inferential fact.
14. The Income-tax Officer had some doubts as to whether the entirety of the expenses debited were really incurred for the assessee-company. Whether that was unreasonable or excessive having regard to the magnitude of the work done by the London company was a question. It was held to be a matter of opinion and an inference drawn from the amount of the work in co-relation to the amount debited. What would be reasonable or not would be an inference of the auditor. The amounts spent, the nature of the work alleged to have been done by the Burmah Oil Co. on behalf of the assessee and the basis of the allocation had been explained in reply to the queries made by the Income-tax Officer before the assessment. In view of this, it was held that the conditions which are necessary for reopening of the assessment were absent.
15. He then relied upon the judgment of the Division Bench of this court reported in CIT v. Mangilal Dhanraj [1985] 155 ITR 71. In the said case, when the assessment of the assessee for the assessment year 1969-70 was pending, the Customs authorities carried out a search of the assessee's residence and seized gold bars and some currency notes. The said information was conveyed to the Income-tax Officer. In spite of that the Income-tax Officer completed the assessment without making any enquiries and without making any additions to the income on account of the seized goods. Thereafter, the Income-tax Officer sought to reopen the assessment under Section 147(a) of the Act. It was held that such a reopening could not have been done as the primary fact of the seizure of gold bars and currency notes was conveyed to the Income-tax Officer and there was no omission on the part of the assessee to make full and true disclosure of the material facts.
16. Considering the facts of our case, these judgments cited by learned counsel for the petitioner have no application. In fact, the law has been laid down by the apex court in the classic case Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 to which we shall make reference shortly.
17. As against this, learned counsel for the respondents relied upon the judgment of the apex court reported in Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT [1986] 159 ITR 624. This was a case where assets consisting of reservoirs, salt pans, piers and condensers and channels, the assessee had not disclosed in the original assessment proceedings for the assessment years 1955-56 to 1962-63 either by a valuation report or by a statement before the Income-tax Officer as to what portion consisted of earth work and what portion or proportion consisted of masonry work. In respect of the entire assets, the Income-tax Officer allowed depreciation of six per cent. If the facts fully and truly have been disclosed then the assessee could not have got such depreciation. The apex court in turn relied upon its earlier judgment reported in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 and quoted with approval the observation of Hidayatullah J. (the learned Chief Justice of India as he then was) to the effect that mere production of evidence before the Income-tax Officer was not enough, that there may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the Revenue could have uncovered but did not, then it is the duty of the assessee to bring it to the notice of the assessing authority. It was observed that the assessee knows all the material and relevant facts the assessing authority might not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent. That was immaterial. But if there is omission to disclose material facts, then, subject to the other conditions, jurisdiction to reopen is attracted. In Calcutta Discount Co. Ltd.'s case , it had been held that if there are some primary facts from which a reasonable belief could be formed that there was some non-disclosure or failure, to disclose fully and truly all material facts, the Income-tax Officer has jurisdiction to reopen the assessment. It was held that there was non-disclosure of primary facts which had caused escapement of income.
18. Learned counsel for the respondents then relied upon the judgment of the Division Bench of this court reported in Raymond Woollen Mills Ltd. v. ITO [1994] 207 ITR 929. The Division Bench in the said case relied upon the judgment of the apex court reported in the case of Calcutta Discount Co. Ltd. [1961] 41 ITR 191 and held that the Assessing Officer had reason to believe that due to the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for those years in question, the income chargeable to tax had escaped assessment. He also relied upon the judgment of another Division Bench of this court reported in CIT v. Esther P. Carvalho (Miss) [1999] 237 ITR 549. The assessee did not disclose the transfer of lands to the partnership firm nor did they disclose these facts at the time of assessment. These lands were introduced by the assessee as capital in the firm of which they are partners. These primary facts were not disclosed by the assessee in the returns of income filed by them which resulted in escapement of capital gains liable to tax on transfer of these lands to the firm. It was held that jurisdiction under Section 147(a) was attracted.
19. Considering what was disclosed in the assessment proceedings and the reasons for reopening the assessment quoted above, it is clear that the respondents have failed to disclose the primary facts and particularly the oral understanding with Grasim Industries Ltd. under which only 18 per cent, interest was paid and the income earned over and above was not disclosed in the return. Various material facts were prima facie suppressed by the petitioner.
20. According to the Revenue, the escaped amount came to Rs. 40,23,45,387. Hence, in our opinion, the notice has rightly been issued and this requires no interference under Article 226 of the Constitution.