1965 Supreme(Gau) 42

GAUHATI HIGH COURT
C.S.Nayudu, S.K.Dutta, JJ.
Dwijendra Chandra Chowdhury -Appellant
Versus
Commissioner of Income Tax, Assam -Respondent
Income Tax Reference No. 6 and 7 of 1964
Decided On : 04-08-1965

The one condition that must be fulfilled before the Income-tax Officer could take action under section 34(1)(a) was that the Income-tax Officer must have had reason to believe that by reason of the omission or the failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year, the income, profits or gains chargeable to income-tax had escaped assessment, etc.

Headnote:

INCOME TAX - SECTION 10 - BUSINESS INCOME - MANAGING DIRECTORS OF A COMPANY - WHETHER EMPLOYEES OR AGENTS - SECTION 34(1)(A) - OMISSION OR FAILURE TO DISCLOSE MATERIAL FACTS - REASSESSMENT - VALIDITY.

Fact of the Case:

The assessees were joint managing directors of a private limited company. Their powers and duties were set out in the articles of association of the company. They were entitled to a monthly remuneration of Rs. 1,000 each and 5 per cent commission on sales. The assessees submitted their income-tax returns for the assessment years 1955-56, 1956-57 and 1957-58 covering respectively the calendar years 1954, 1955 and 1956, respectively. During the calendar year 1953 and assessment year 1954-55, the assessees in addition to their remuneration of Rs. 1,000 per month in each case had also received some amount towards commission and in the return for that year they showed the receipt of both these items. The assessees were assessed on the basis of their return, that is on the basis of what was actually received by way of commission in addition to the monthly remuneration of Rs. 1,000 in each case. Hence, this assessment, it is claimed, was done on the basis of business income. Similarly, the assessments for the assessment years 1955-56 and 1956-57 were also completed, on the basis of the returns filed by the assessees, on March 28, 1957. But in the returns for these two assessment years only the remuneration of Rs. 1,000 per month was included and no amount was shown as commission receipts, in view of the fact that the assessees did not actually receive any amount towards the commission. It is also the case of the assessees, in this connection, that while the company followed 'the mercantile system of accounting', the assessees followed 'the cash system', reckoning as income only amounts that had been actually received into their hands, and since no amount towards commission had been received during the assessment years in question, namely, 1955-56 and 1956-57, that is the calender years 954 and 1955, respectively, the returns did not show any commission, the same having not been actually received. The assessment for all the three assessment years, as indicated above, was completed on March 28, 1957, and the assessees were assessed on the basis of their returns for all these yearsSubsequently, the assessment of the company was completed on February 25, 1959. The scrutiny of the accounts of the company revealed that the two sums of Rs. 73, 996 and Rs. 91, 589 had been debited in the books of the company and the two sums of Rs. 36, 998 and Rs. 45, 695 were in each case credited in the personal accounts of the assessees as commission calculated at 5 per cent. on the sales, during the respective calendar years, namely, 1954 and 1955. From a note, appearing at page 51 of the printed paper-book, in the assessment order made by the Income-tax Officer against the company for the year of assessment 1955-56, it appears that the joint managing directors, that is, the assessees herein, had not shown receipt of any income by way of commission in the returns filed by them for the calendar years 1954 and 1955. Subsequent to the completion of the assessment of the company's income on February 25, 1959, notices were served on the assessees on March 19, 1959, under section 34(1) of the Indian Income-tax Act, 1922, hereinafter referred to as the Act, in regard to the assessment years 1955-56 and 1956-57 and on the basis of those notices the 5 per cent. commission that was debited in the company's accounts as payable to the joint managing directors was respectively added to their remuneration of Rs. 1, 000 per month, in respect of which the assessees had already submitted their returns, and acting under section 34 of the Act, the Income-tax Officer made the impugned reassessments. The assessees contended that their income of Rs. 1, 000 per month was only a remuneration and represented a business income and not a salary, that, therefore, they could only be assessed under section 10 of the Act and not under section 7; that the 5 per cent. commission which had not, in fact, been received by them, could not have been included in the return as it did not represent moneys that had been received, and the returns submitted by them originally were correct and proper, and that there was no omission or failure on the part of the assessees to disclose any of the material facts necessary for enabling the Income-tax Officer to make a correct assessment, and that, therefore, no action could have been taken under section 34 of the Act and that the notices issued under section 34 are not valid and thus the assessees are not liable for any reassessment under that section.

Finding of the Court:

The Tribunal was not justified in assuming that there was a statutory obligation on the part of the assessees to include in the returns the amount of commission, whether the same had been paid or notThe real test is as propounded by their Lordships of the Supreme Court and as enunciated by the various authorities referred to above by us in our judgmentAnother argument is sought to be based on article 49 of the articles of association in this case, which declared that the managing directors shall be the 'chief executive officers' of the company. The functions of the joint managing directors involve the performance of executive functions on behalf of the company and it is only right and proper that by virtue of part of their duties, they should be treated as exercising the powers of chief executive officers of a company. The duties of agents and managing agents of a company essentially partake of the character of management of the affairs of the company which necessarily involves the exercise and performance of executive functions, and this being the case, nothing, in our opinion, turns on the employ of the expression 'chief executive officers' in connection with the joint managing directors' duties

Issues: 1. Whether, on the facts and in the circumstances of the case, the remunerations received by the assessee from Messrs. Eastern Tea Estates (P.) Ltd., in the relevant years of account, are assessable under section 10 of the Indian Income-tax Act, 1922? 2. Whether, on the facts and in the circumstances of the case, the initiation of the proceedings in reassessment under section 34(1)(a) for the assessment years 1955-56 and 1956-57 was legally valid?

Ratio Decidendi: Before the action could be taken by the Income-tax Officer under section 34(1)(a) of the Act, the Income-tax Officer must have been satisfied that there was failure on the part of the assessee either (a) to make a return of his income under section 22 for any year; or (b) to disclose fully and truly all material facts necessary for his assessment for that year; and this failure or omission must have resulted in the income, profits or gains chargeable to income-tax having escaped assessment for the year in question or having been under-assessed, etc., as indicated in the aforesaid provision

Final Decision: The references are accordingly allowed with costs. There shall, however, be one set only of advocate's fee which is fixed at Rs. 500