THE issues before the Bench are - Whether there is anything in Section 147, which prohibits reopening of an assessment completed u/s 143(1) on the ground that the assessee failed to furnish the primary facts fully and truly and Whether it is difficult to attribute any knowledge to the AO while he is dealing with a return for a particular year u/s 143(1), as to what he had done in the case of the same assessee in the earlier AYs. And the ruling goes against the assessee.
Facts of the case
The petitioner is a law firm specialising in intellectual property and corporate laws and was founded in 1827 by one Henry Oliver at Calcutta. In the year 1957 certain Englishmen took over the firm. By deed dated 04.04.1973 these gentlemen by names Holloway and Silver Stone
transferred the firm absolutely to Dr. V. Sagar, a lawyer. The transfer took effect from April, 1973 and the entire practice of the firm became that of Dr. Sagar. On 18.10.2000 a company, i.e. Remfry & Sagar Consultant Pvt. Ltd. was incorporated and one of its objects was that the goodwill of the firm Remfry & Sagar would vest in it in perpetuity. On 01.06.2001, Dr. Sagar executed a gift deed by which the goodwill of the name “Remfry & Sagar” was transferred to the private limited company. Since a limited company cannot practice the legal profession, on 05.06.2001 Dr. Sagar entered into partnership with four other partners for carrying on legal practice. On the same day i.e. 05.06.2001 an agreement (“licence agreement”) was entered into between the company and the firm constituted by Dr. Sagar and four others, which is known as Remfry & Sagar, under which a licence was granted to the petitioner for use of the goodwill and name of Remfry & Sagar subject to payment of licence fee @ 25% of the amount of the bills raised.
In the return of income filed by the petitioner for the AY being 2002-03, it claimed the payment made to the company under the licence agreement as revenue expenditure, which was processed u/s 143(1) and the deduction was allowed. In the assessment made for the AY 2003-04 to 2006-07 also the amounts paid by the petitioner under the licence agreement were allowed as a deduction; in the first three AYs, the assessments were completed u/s 143(3) after scrutiny of the returns and in respect of the last year, the return was processed u/s 143(1). On 30.03.2010, notices u/s 148 was issued for reopening the four completed assessments. The reasons recorded was that though scrutiny assessment has been made in AY 2003-04, no question was asked during assessment on this issue in questionnaire, neither was the justification and allowability of the deduction of Licence Fee payment to M/s Remfry & Sagar Consultants Pvt. Ltd. for the use of goodwill of “Remfry & Sagar” and to practice in this name examined. Also, neither did the assessee suo motu furnish information nor did the assessee suo motu furnish reasons as to why the said claim is allowable. So the issue was not examined at all in AY 2003-04. Further that the facts and the issues for the AY 2003-04 are the same as AY 2007-08.
Aggrieved, the assessee filed a writ petition before the High Court.
The petitioner contended for the AY 2003-04 and 2004-05 the assessee had submitted profit and loss account and the tax audit report which showed the particulars relating to payments made to connected persons as specified under section 40A (2)(b). Further it was contended that the copy of the partnership deed was provided whose preamble traced the history of payment of the licence fee, which included reference to the agreement for payment of the licence fee to the company. Therefore, it was submitted that there was no failure to furnish primary facts and assessment was reopened on a mere change in opinion. The contention of the petitioner in respect of the AY 2005-06 is that the licence agreement was submitted at the time of the original assessments which was also scrutinised and the assessment was completed u/s 143(3) and, therefore, the reopening of the assessment was a mere change of opinion. The argument for the AY 2006-07 was that the mere fact that the original assessment was completed u/s without any scrutiny cannot lead to the conclusion that the respondent did not form any opinion on the issue of allowability of the licence fee; consequently the reassessment for this year is also vulnerable to the charge of being prompted by a change of opinion. It was therefore, contended that no factual or legal distinction can be made between the first three AYs in which scrutiny assessments were made and the AY 2006-07 in which the original return was merely processed u/s 143(1).
On the other hand, the DR submitted that submitted the licence agreement between the assessee and Remfry & Sagar Consultant Pvt. Ltd. was not filed in any of the AYs; and according to her, the licence agreement constituted a primary fact on the basis of which the claim was made and if that is not filed, it would amount to non-disclosure of primary facts within the meaning of Explanation 1 to Section 147. She further submitted that once it is established that the primary facts were not furnished, the fact that the petitioner had filed the partnership deed in which there is a narration of the history of the firm or that the letter dated 28.03.2005 filed by the assessee in the course of the assessment proceedings would not come to the rescue of the petitioner.
Having heard the parties, the High Court held that,
++ it is in the light of the statutory language that we have to examine the reasons recorded under section 148(2) of the Act in the present case. A perusal of the reasons recorded shows that the respondent has clearly stated therein that the assessee has not disclosed all material facts correctly and fully and there was failure on its part to disclose fully and truly all material facts necessary for his assessment as per the proviso to section 147 of the Act, by reason of which there was escapement of income chargeable to tax. The reasons also refer to the fact that in the course of the assessment proceedings for the year 2007-08 the licence agreement entered into in June, 2001 was examined but the claim for deduction of the licence fee payment was found not allowable. It further refers to the fact that in the course of the assessment proceedings for the assessment years 2003-04, 2004-05, 2005-06 and 2006-07 neither the assessee suo motu furnished information (regarding the licence fee payment) nor did it furnish reasons as to why the said claim is allowable. It is true that the genesis of the present proceedings was the scrutiny assessment made for the assessment year 2007-08 in the course of which the petitioner had furnished the licence fee agreement; it is equally true that the respondent has clearly stated in the reasons recorded that there was failure on the part of the petitioner to furnish full and true particulars. The reference to failure of the petitioner is obviously to the failure to file the licence fee agreement, if regard is had to the reasons read as a whole, and the specific reference therein to the petitioner having filed the agreement in the assessment proceedings for the year 2007-08 as contrasted with the petitioner's failure to furnish full and true particulars or material facts at the time of the original assessments for the four earlier assessment years. It seems to us proper to understand and appreciate the reasons recorded in a fulsome manner and not to treat them as statutes and so long as the failure of the assessee to furnish primary or material facts has been brought out in sufficient relief, it is not necessary to insist on the specific failure of the assessee being stated in the reasons. A parrot-like repetition of the statutory language without any substance would certainly not amount to satisfying the jurisdictional conditions but if the language used coupled with the context is sufficiently capable of conveying the fact that there was failure on the part of the assessee to furnish primary facts fully and truly at the time of original assessment, that should be sufficient compliance with the requirements of section 148(2) of the Act. In this view of the matter we are unable to accept the contention of the petitioner that the failure to refer to the omission of the petitioner specifically to file the licence agreement (in the reasons recorded) is fatal to the validity of the reassessment proceedings;
++ we now proceed to a consideration of the question whether the licence agreement dated 05.06.2001 is a primary fact which ought to have been placed by the petitioner before the assessing officer in the course of the original assessment proceedings. In Calcutta Discount Co. Ltd. v. Income-tax Officer a constitution Bench of the Supreme Court held that it was the duty of the assessee to furnish all the primary and material facts fully and truly before the assessing authority and failure to do so would invite action for reassessment. It was further held that the duty ends there and it is for the assessing authority to draw the appropriate inferences from those primary facts and it is not the duty of the assessee to advise him as to what inferences may be drawn, both of fact and law;
++ as to what would be a primary fact would largely depend on the facts and circumstances of each case. In Associated Stone Industries (Kotah) Ltd. v. CIT the Supreme Court was concerned with the correctness of the action under section 34(1)(a) of the Indian Income Tax Act, 1922 which authorised the assessing officer to reopen an assessment on the ground of failure on the part of the assessee to disclose material facts. It would thus appear that whenever a claim is made for any deduction or allowance or relief in the computation of the total income, and if the claim is based on the terms and conditions of a document or documents, it is the duty of the assessee to place before the assessing officer the document or documents; the document would constitute the primary fact. The word “primary” means “that which is first in order, rank or importance; anything from which something else arises or is derived” (P. Ramanatha Aiyar's The Major Lexicon, IVth Edition 2010). In the petitions before us, it is an admitted position that the petitioner did not furnish the licence agreement dated 05.06.2001 before the assessing officer in the course of the original assessment proceedings for any year. The claim for deduction of the licence fee payment undeniably was based on the terms and conditions of the licence agreement. Only an appraisal of the various clauses of the agreement would have enabled the assessing officer to arrive at a conclusion regarding the allowability of the payment as business expenditure. Since the primary document, that is, the primary fact was not furnished, there was in our opinion such failure on the part of the petitioner as would attract the provisions of section 147 of the Act; it is a case to which Explanation 1 is attracted;
++ it is now necessary to examine the argument of the petitioner that several other facts and materials were before the assessing officer on the basis of which he could have examined the allowability of the claim. It was in particular contended that the partnership deed which was filed in the course of the original assessment proceedings narrated the history of the petitioner firm in the preamble wherein there was reference to the payment of the licence fee as also to the agreement, which would amount to sufficient disclosure. Reference was also made to the petitioner's letter dated 28.03.2005 written to the assessing officer in the course of the assessment proceedings for the assessment year 2003-04 in which the relevant primary details were said to have been furnished. We have perused the partnership deed dated 05.06.2001 entered into between Dr. Sagar, Sampath Kumar, Ashwin Julka, Ramit Nagpal and Prem Nath Sewak. The preamble to the deed traces the history of the firm. Clause VIII of the preamble records that pursuant to a request by the partners, the company agreed to permit the partners and the firm to use the name “Remfry & Sagar” in the carrying on of the practice and in connection therewith on terms and conditions incorporated in an agreement being entered into between the partners and the company contemporaneously with the execution of the deed of partnership. Our attention was not referred to any other clause in the partnership deed, which explains the terms and conditions incorporated in the licence agreement. Clause VIII of the preamble therefore cannot be considered as disclosure of a primary fact since all it does is to refer, in passing, to the licence agreement and nothing more. From this clause, it was not possible for the assessing officer to adjudicate upon the allowability or otherwise of the licence fees. The letter dated 28.03.2005 merely contained a note on the history of the firm and a note on its business activities. A copy of the partnership deed was enclosed to the letter; beyond that there is no reference to the licence agreement or to its terms and conditions. Thus, neither the partnership deed nor the letter can be considered to be primary facts on the basis of which an inference as to the allowability of the licence fee payment can be properly drawn by the assessing officer;
++ the profit and loss account, the tax audit report and the annexures thereto and the replies to the questionnaire issued by the assessing officer in the course of the original assessment proceedings do not contain anything with regard to the licence fee agreement. The annexure to the tax audit report only explains item No.18 of the report which requires particulars of payment made to the persons specified under Section 40A(2)(b) to be given. In the annexure III to the tax audit report what has been disclosed is that Remfry & Sagar Consultants Pvt. Ltd. was a company in which partners of the petitioner or their relatives were substantially interested and payments by way of licence fees, infrastructure usage fees, secretarial accounting and other support services were paid. This disclosure is only for the purpose of Section 40A(2)(b) which permits the assessing officer to disallow such payments to the extent they are found to be unreasonable having regard to the various factors spelt out in the Section. Furnishing of these particulars can in no way be considered as furnishing the primary facts in relation to the allowability of the payment of the licence fees which, as noted earlier, can be adjudicated upon only if the terms and conditions stipulated in the agreement are made known to the assessing officer;
++ the contention of the counsel for the petitioner that the reopening of the assessments was prompted by the opinion which the respondent formed while framing the assessment for assessment year 2007-08 that the licence fee payment was not an allowable deduction, cannot be accepted because, as we have observed earlier though the genesis of the issue can be traced to the assessment proceedings for the assessment year 2007-08, the reasons recorded show that the assessing officer took proceedings under Section 147 on the ground that the licence agreement was not filed by the petitioner in the original assessment proceedings. When there is a failure on the part of the petitioner to furnish the primary facts, it is futile to examine the question whether the re-assessment was prompted by a change of opinion based on the view which the assessing officer took in subsequent assessment proceedings;
++ in respect of the assessment year 2006-07 there was no earlier assessment under Section 143(3). The return was merely processed by the assessing officer under Section 143(1) and since he did not have any opportunity to form an opinion regarding the allowability of the licence fee, the question of change of opinion does not arise. However, he must have “reasons to believe” that income chargeable to tax had escaped assessment and the reasons should be based on valid materials and should not be a pretence. It must have a rational connection or nexus or live link with the materials before the assessing officer. Even for this year, the petitioner had not furnished the license agreement along with the original return. The argument of the counsel for the petitioner is that the earlier three assessments were completed under Section 143(3) in which the license fee payment was allowed as a deduction and therefore the respondent did not feel the need to make any changes to the return filed by the assessee for the assessment year 2006-07 and since he was conscious of the fact that the license fee payments have been allowed by him as a deduction in the three earlier years, he took a conscious decision, though under Section 143(1), to allow the licence fee payment for the assessment year 2006-07 also, and in that sense the subsequent reopening of the assessment must be held to be based on a mere change of opinion. We find it difficult to accept this strained and somewhat convoluted argument, if we may say so, with respect. It is difficult to attribute any knowledge to the assessing officer while he is dealing with a return for a particular year under section 143(1), as to what he had done in the case of the same assessee in the earlier assessment years. Therefore, we are not able to accept the argument that the assessing officer consciously allowed the license fee payment as a deduction when he accepted the return under Section 143(1). All we have to see is whether there was “reason to believe” within the meaning of Section 147. The fact that the petitioner did not place the primary facts relating to the claim of the license fee by filing the license agreement dated 05.06.2001 along with the return of income filed for the assessment year 2006-07 would itself constitute reason to believe that primary facts have not been furnished by the petitioner. There is nothing in Section 147 prohibiting the reopening of an assessment completed under Section 143(1) on the ground that the assessee failed to furnish the primary facts fully and truly. In our opinion, failure to furnish the primary facts would constitute reason to believe authorising the issue of notice under Section 148 of the Act also in a case where the first assessment was made by a mere processing of the return under Section 143(1).
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