JUDGMENT [ENTITY], J.
1. This is an appeal against the judgment and order of a learned single judge of this High Court dismissing a writ petition under [SECTION] of the [ACT] by which the appellants were seeking to quash and set aside a notice dated August 11, 1969, in respect of the assessment year 1959-60, and five notices dated March 15, 1969, in respect of the assessment years 1960-61, 1961-62, 1962-63, 1963-64 and 1964-65, issued by the first respondent under [SECTION] of the [ACT].
2. By an agreement dated October 4, 1951, entered into between the Godavari Sugar Mills Ltd. and the first appellant-company (hereinafter referred to as "the appellant-company"), the Godavari Sugar Mills Ltd. appointed the appellant company as their sole selling agents for sale of all products which might be manufactured by the Godavari Sugar Mills Ltd. for a term of 20 years commencing from May 16, 1951. The second appellant is a director of the appellant-company and has joined in filing this writ petition.
3. The particular clause of the said agreement which is material for our purpose is [SECTION]. The said [SECTION] is in the following terms :
"12. IT IS ALSO FURTHER AGREED AND DECLARED THAT in case this agreement is terminated for any reasons whatever including Government intervention but except those mentioned in clause 9 hereof the agency company (that is, the appellant-company) will be entitled to its commission at the rate aforesaid (that is, at the rate of Rs. 1-2-0 (rupee one and annas two) per Rs. 100 on the amount of the sale proceeds of its entire products) on all proceeds realised from the sale of products manufactured by the company (that is, the Godavari sugar Mills Ltd.) by way of compensation for the loss of business during the residuary term and such commission shall be paid to them in the month of June following by way of compensation for the loss of business during the residuary term and such commission shall be paid to them in the month of June following the termination of each of the remaining sugar making seasons. Provided, however, that if such residuary term be more than five years then the company shall pay such compensation only in respect of the sale proceeds realised from the sale of its products only during five years succeeding the date of termination of this agreements as aforesaid."
4. Clause 9 of the said agreement, which is referred to in the said [SECTION], conferred upon the Godavari Sugar Mills Ltd. an option to terminate the said agreement forthwith upon any fraud being committed by the appellant-company. This clause is irrelevant for the determination of the present appeal.
5. By the [ACT], the old [ACT] was repealed and replaced by a more exhaustive statue. The [ACT], came into force on April 1, 1956. By [SECTION] of the said Act restrictions were placed upon the appointment of selling and buying agents of a company. [SECTION] and [SECTION] of the said Act provided as follows :
"361. Existing contracts relating to matters dealt with in [SECTION] to terminate on 1st March, 1958. - All contracts in force at the commencement of this Act, to which a company or the managing agent or an associate of the managing agent of a company is a party, shall, in so far as the contracts relate to any of the matters referred to in [SECTION], be deemed to terminate on the first day of March, 1958, unless they terminate on an earlier date."
"[SECTION]. Remuneration received in contravention of foregoing sections to be held in trust for company. - (1) Where the managing agent of a company, or an associate of the managing agent, receives any sum from the company, whether directly or indirectly, by way of remuneration, rebate, commission, expenses or otherwise, -
(a) in the case of a public company, or a private company which is a subsidiary of a public company, in contravention of [SECTION] and [SECTION]; or
(b) in the case of a private company which is not a subsidiary of a public company, in contravention of [SECTION];
the managing agent or associate shall refund such sum to the company and, until such sum is so refunded, hold it in trust for the company.
(2) The company shall not waive the recovery of any sum refundable to it under sub-section (1) unless permitted by the Central Government."
6. Originally, when the [ACT], was enacted, the receipt of any such remuneration, rebate, commission, expenses or other payment in contravention of the prohibition contained in [SECTION] was not an offence. However, on December 28, 1960, the [ACT], came into force. By this Amendment Act a new section, namely, [SECTION], was inserted in the [ACT] under which, inter alia, if a company or any other person contravened any provisions of that Act, for which no punishment was provided elsewhere in the Act, the company and every officer of the company who was in default was punishable with fine which may extend to Rs. 500 or where the contravention was a continuing one, with a further fine which may extend to Rs. 50 for every day after the first day during which the contravention continued.
7. Admittedly, the appellant-company was an associate of the managing agents of the Godavari Sugar Mills Ltd. and, consequently, in view of the provisions of the said [SECTION], the sole selling agency of the appellant-company stood terminated on March 1, 1958, and by reason of the provisions of [SECTION], on and after December 28, 1960, and receipt of compensation by the appellant-company in respect of the termination of its sole selling agency would have been a criminal offence, and its failure to refund the amount immediately to the Godavari Sugar Mills Ltd. would have been a continuing offence for each day after the first day that such amount was not refunded.
8. The appellant-company's accounting year is from June 1 to May 31. In its return in respect of the assessment year 1959-60 (in respect of the accounting year June 1, 1957, to May 31, 1958), the appellant-company showed the commission earned by them under the said sole selling agency agreement from June 1, 1957, up to February 28, 1958. It also filed along with its return a profit and loss account, balance-sheet and the directors' report. In the said profits and loss account it was specifically stated that a sum of Rs. 2,52,435 was earned as selling agency commission up to February 28, 1958, from the Godavari Sugar Mills Ltd. In the directors' report under the heading "Sugar Selling Agency Commission" it was stated that the appellant-company's income comprised mainly of Rs. 2,52,435 received as selling agency commission from the Godavari Sugar Mills Ltd. up to February 28, 1958, only. The directors' report further went on to state : "as per [SECTION] of the [ACT], we ceased to be the selling agents of M/s. Godavari Sugar Mills Ltd. from 1st March, 1958". In assessment proceedings for the subsequent years the appellant-company did not show any amount by way of income earned as selling agency commission. It is pertinent to point out that in the assessment order for the assessment year 1960-61 the ITO observed that the appellant-company did not receive any commission from the Godavari Sugar Mills Ltd. In the next year's assessment order it was stated that the appellant-company used to serve as selling agents of the Godavari Sugar Mills Ltd., but since the coming into force of the new [ACT] the selling agency agreement no longer existed. Thus, in these assessment proceedings it was accepted as a position in law that the said sole selling agency agreement stood terminated and ceased to be effective on and from March 1, 1958.
9. By his letter dated March 3, 1969, the first respondent called upon the appellant-company to show cause why proceedings under [SECTION] of the [ACT] for the assessment years 1958-59 and 1959-60 should not be issued in order to assess to tax the income that was receivable by the appellant-company in terms of [SECTION] of the said sole selling agency agreement. In the said letter this agreement was described as "subsisting up to 28-2-1958". It was further stated in the said letter than in terms of the said [SECTION] the commission due on sales effected by the Godavari Sugar Mills Ltd. for a period of five years was payable to the appellant-company notwithstanding the termination of the said agreement and that no case of waiver born out of commercial expediency had been established, and no disclosure of material facts in that behalf had been made by the appellant-company in the course of the original assessments for the assessment years 1958-59 and 1959-60, and thereafter, had escaped assessment, the provisions of [SECTION] were attracted. By its reply dated March 12, 1969, the appellant-company pointed out that as it had become an associate of the managing agents of the Godavari Sugar Mills Ltd. by reason of the provisions of [SECTION] of the [ACT], the said sole selling agency agreement was deemed to have been terminated on March 1, 1958, and as it stood terminated by virtue of a statutory provision, there was no question of the appellant-company earning any agency commission for any period after that date. In the said letter the company also contended that [SECTION] had no application because the agreement had not stood terminated by reason of any of the contingencies provided for in the said [SECTION]. Referring to the contention of ITO that no case of waiver by reason of commercial expediency had been made out, the appellant-company pointed out in the said letter that both the appellant-company and the Godavari Sugar Mills Ltd. had taken legal advice and were informed that no compensation was payable to the appellant-company under the said [SECTION], and, therefore, on the basis of this advice it was decided that the said agreement should be treated as at an end as on February 28, 1958. It was further pointed out in the said letter that since both these companies had been advised that no commission was payable, there was no question of the appellant-company taking any legal steps to recover the compensation and that they did not take any such steps by way of commercial expediency. Thereafter, the first respondent issued the said six notices. In each of these notices it was stated that whereas the ITO had reason to believe that the income in respect of the assessment year to which the notice referred was assessable and chargeable to tax for the assessment year had escaped assessment within the meaning of [SECTION] of the [ACT], the first respondent proposed to reassess the income. Each of these notices required the appellant-company to file a return in respect of the assessment year in question. These returns were filed. Ultimately, the appellant-company and the second appellant filed the writ petition, out of which this appeal arises, to quash and set aside the said notices and to restrain the respondents and their officers and agents from taking any proceedings against the appellant-company in view of the said notices or any of them.
10. The learned single judge who heard that petition came to the conclusion that the appellant-company was under an obligation to have specifically brought to the notice of the ITO that it was entitled to receive commission in terms of [SECTION] of the said agreement irrespective of the fact that a copy of the said agreement was on the record of the ITO. The learned judge further held that unless the accounts were reopened it would not be possible for the I. T. authorities to ascertain whether or not the appellant-company had received commission to which under the said [SECTION] it was entitled.
11. It is an admitted position that the impugned notices have been issued on the ground that the appellant-company has omitted or failed to disclose fully and truly all material facts necessary for its assessments for the years in question. The relevant provisions of [SECTION] of the [ACT] provide as follows :
"147. Income escaping assessment. - If -
(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year
he may, subject to the provisions of [SECTION], assess or reassess such income for the assessment year concerned "
12. Under [SECTION] of the [ACT] before making the assessment, reassessment or recomputation under [SECTION], the ITO has to serve on the assessee a notice as provided for in that sub-section. Thus, before a notice can issue under [SECTION], so far as the present case is concerned, two conditions were necessary to be fulfilled : (1) the ITO must have reason to believe that income chargeable to tax for a particular assessment year had escaped assessment, and (2) such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment for that year. We will not see whether either or both of these conditions have been satisfied in the present case. Admittedly, the case does not fall under [SECTION] of the said agreement because there was no question of termination of the said agreement by the Godavari Sugar Mills Ltd. by reason of any fraud committed by the appellant-company. What is contended on behalf of the respondents is that by reason of the provisions of the said [SECTION] the appellant-company became entitled to receive as and by way of compensation commission at the agreed rate on all the sales effected by the Godavari Sugar Mills Ltd. for a period of five years from March 1, 1958, and that it had failed specifically to draw the attention of the ITO to this clause in the courses of its assessment proceedings. The question which really arises is whether the appellant-company at all became entitled to any compensation.
13. [SECTION] of the [ACT], provided for a statutory termination of all contracts, including selling agency agreements, to which a company or its managing agent or an associate of the managing agent is a party. The [ACT], however, did not leave the matter there. Since the intention of Parliament was to prevent a company or its managing agent or an associate of the managing agent of a company from making profits at the expense of the shareholders of the company, certain consequence resulting from such statuary termination were provided for in [SECTION] of the [ACT]. Under this section where the managing agent of a company or an associate of the managing agent received "any sum from the company, whether directly or indirectly, by way of remuneration, rebate, commission, expenses or otherwise", in contravention of [SECTION], then the managing agent or an associate was to refund such sum to the company concerned and, until the sum is so refunded, it was to hold it in trust for the company and the company was not to waive the recovery of any sum so refundable to it unless permitted by the Central Govt.
14. By reason of the provisions of [SECTION] it was not open to the appellant-company to receive any compensation from the Godavari Sugar Mills Ltd. as compensation or otherwise in respect of the statutory termination of its sole selling agency, and if it received any such compensation by reason of [SECTION] it was under a statutory obligation to refund that amount to the Godavari Sugar Mills Ltd. and till the time of such refund to hold it as trustees for the Godavari Sugar Mills Ltd. Thus, no part of the amount of such compensation would belong to or form the income of the appellant-company. If so, it cannot be said that the amount of such compensation was income chargeable to tax which had accrued to it, and the very first condition for the applicability of [SECTION] of the [ACT] would be absent.
15. Mr. [ENTITY], learned counsel for the respondent, however, submitted that under the said [SECTION] the appellant-company had the right to receive compensation in respect of the termination of the sole selling agency for any reason whatever other than termination under [SECTION] of the said agreement. If [SECTION] had stood by itself, this argument would have been sound. However, [SECTION] is a part of the agreement between the parties, and a contract cannot override the statute. Irrespective of what the said [SECTION] provided, [SECTION] prescribed a prohibition against the appellant-company from receiving any such compensation. Unfortunately, this section was not brought to the notice of the trial court, and the entire matter proceeded in that court merely upon a construction of the said [SECTION].
16. Mr. [ENTITY] next submitted that under [SECTION] of the [ACT] the appellant-company was not prohibited from receiving compensation under [SECTION] of the said agreement. In Mr. [ENTITY]'s submission the words "or otherwise" occurring in [SECTION] are to be construed ejusdem generis. He laid emphasis upon the fact that in [SECTION] of the [ACT], the word "compensation" was expressly used, while the words which were used in [SECTION] were "remuneration, rebate, commission, expenses or otherwise". This argument of Mr. [ENTITY] overlooks the object underlying [SECTION] on the one hand and [SECTION] on the other and the purpose which each of these two sections seeks to achieve. [SECTION] deals with only one single topic, namely, prohibition of payment of compensation for loss of office to a managing agent in certain cases. Under that section where a managing agent loses his office by the happening of any of the events provided in that section, the company is not to pay and is not to be liable to pay to the managing agent any compensation for the loss of his office. Thus, since [SECTION] deals only with the topic of compensation, to a managing agent, it is but natural and logical that it should use the word "compensation". [SECTION], however, deals with a number of contingencies. It prohibits the receiving of any remuneration or other payments, directly or indirectly, in contravention of [SECTION]. It is pertinent to note that it does not deal only with [SECTION] alone. [SECTION] and [SECTION] lay down a prohibition with respect to the appointment of a managing agent or an associate of a managing agent as a selling agent of goods produced by the company. Similarly, [SECTION] prohibits and prescribed restrictions for the appointment of a managing agent or an associate of a managing agent as buying agent for a company. [SECTION] deals with as to when commission can be paid to a managing agent as buying or selling agent of other concerns and the condition which circumscribe such payment. [SECTION], as we have been, statutorily terminates with effect from March, 1, 1958, all contracts in force at the commencement of the [ACT], namely, April 1, 1956, in which a company or the managing agent or an associate of a managing agent of a company is a party. Thus, this group of sections deals with different payments, and the payments which could be made in contravention of these sections cannot be described by one word alone. It would also have left a loophole for unscrupulous managing agents or an associate of an agent not to make the wordings of [SECTION] wide enough to prevent them from receiving any payment which [SECTION] were intended to prevent. Therefore, what [SECTION] did was to prohibit any such payment made "whether directly or indirectly", and cover all payments which may not be included within the expression "by way of remuneration, rebate, commission, expenses" by adding there to the words "or otherwise". In this connection, we may as well deal with a few other arguments advanced by Mr. [ENTITY]. Mr. [ENTITY] urged that the sole selling agency was put an end to by the Godavari Sugar Mills Ltd. and by the appellant-company by mutual agreement. In support of his submission he relied upon what was stated in the appellant-company's said reply dated March 12, 1969, to the first respondent's notice dated March 3, 1969. In the appellant-company's said letter it was, inter alia, stated that the appellant-company as also the Godavari Sugar Mills Ltd. took legal advice as to the effect of [SECTION] and [SECTION], and they were advised that the sole selling agency would statutorily come to an end with effect from March 1, 1958, and the appellant-company would not be entitled to receive any commission. The letter then proceeded to state : "based on this advice and as a matter of commercial prudence, it was decided between ourselves and the Godavari Sugar Mills Ltd. that the said selling agency agreement should be treated as at an end as on 28th February, 1958". This termination was not a matter of contract of a voluntary act on the part of the parties. What was meant by this sentence was that the parties had taken legal advice and, having seen the force of it, decided to implement the provisions of law.
17. It was next urged by Mr. [ENTITY] that the appellant-company did not claim compensation as a matter of commercial expediency. In this again he relied upon what was stated in the very same letter. The relevant passage of the said letter is as follows :
"You will appreciate that our not taking any steps for recovery of any commission under the said clause 12 was as a result of the legal advice that we had then received, and in any view of the matter, our conduct coupled with the conduct of the Godavari Sugar Mills Ltd., itself amounts to novation of the earlier agency agreement, which novation was in any view of the matter clearly born out of commercial expediency."
18. We are surprised at the type of arguments which the revenue has advanced in this appeal before us. Reliance upon this passage was placed tearing the passage out of its context and reading it divorced from the rest of the letter. In his said notice dated March 3, 1969, the first respondent had stated that the appellant-company had not made out any case of waiver born our of commercial expediency. It was to meet this point that what has been reproduced earlier was stated in the said letter, but what is really meant is quite clear. The appellant-company was advised that it had no legal right whatever to receive any compensation under the said clause 12, and as a matter of prudence and commercial expediency it though it wiser and better not to throw away good money after bad by fighting a hopeless litigation, for, after all, one must bear in mind that when a private party litigates it litigates at its own expense and not at the cost of public exchequer.
19. If as we have held above no income whatever by way of compensation under [SECTION] of the said agreement accrued to the appellant-company, the question of its omission or failure to disclose the fact that it was not entitled to receive compensation on such termination cannot possibly arise. This question can arise only if the appellant-company was entitled to compensation under the said [SECTION]. Since, however, the case before the trial court proceeded upon the basis of [SECTION] only, we will deal with this question also on the assumption that the appellant-company was entitled to compensation. Even in such an event what was it that the appellant-company was bound to disclose to the ITO ? It was said that it was for the appellant-company to have pointed out that it was entitled to compensation under the said [SECTION], and its not doing so was an omission or failure on its part to disclose fully and truly all material facts necessary for its assessment for the relevant years. This argument overlooked several facts. It overlooks that the sole selling agency agreement admittedly was on the file of the ITO. It overlooks the fact that from year to year until the sole selling agency commission received by it as part of its income. It overlooks the fact that in its directors' report for the assessment year 1958-59, it is specifically mentioned that the sole selling agency stood terminated by reason of the provisions of the said [SECTION]. It also overlooks the fact that this very section of the [ACT] has been referred to as the reason for the termination of the sole selling agency in the assessment year 1961-62. The extent to which an assessee is bound to disclose facts so as not to come within the scope of the said [SECTION] of the [ACT] has been defined by the Supreme court in [PRECEDENT]. Though that was a case under [SECTION] of the earlier [ACT], he material provisions of the said section and [SECTION] of the present Act are in pari materia. In that case, the Supreme Court held that the duty of an assessee extended to a full and truthful disclosure of all primary facts, and whether he had disclosed all primary facts or not was a question to be determined upon the fats of each case. The Supreme Court further held that once all the primary facts were before the assessing authority, the assessing authority required no further assistance by way of disclosure, and it was for him to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn. The Supreme Court observed (p. 201) :
"It is not for somebody else - far less the assessee - to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences - whether of facts or law - he would draw from the primary facts.
If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might not have drawn ?"
20. It must also be borne in mind that having all the materials before it if the assessee failed to disclose any facts, equally the ITO failed to notice the facts which were already on his record and which had been disclosed to him. A case very similar to the present one, assuming that some income accrued by way of compensation to the appellant-company, came up for decision before the Gujarat High Court. That case was [PRECEDENT]. In that case, excess depreciation had been allowed to the assessee. This was by reason of the failure on the part of the assessee to disclose the amount of initial depreciation at the time of the assessments for the relevant years. The question that arose was whether by reason of the allowance of such excess depreciation income chargeable to tax had escaped assessment by reason of the omission or failure on the assessee's part to disclose fully and truly such material facts. The Gujarat High Court held that just as there was a duty on the part of an assessee to see to it that the allowance of initial depreciation was disclosed by it, there was also a duty on the part of the ITO concerned to see to it that the aggregate of all allowances in respect of depreciation did not exceed the original cost to the assessee and that if that duty had been properly discharged by the ITO, no excess depreciation would have been allowed to the assessee. The Gujarat High Court further held that it was because of the combined operation of the omission or failure on the part of the assessee to disclose the material facts to the ITO and the dereliction of duty on the part of the ITO in failing to see whether the aggregate of all allowances in respect of depreciation had exceeded the original cost to the assessee that the situation came about under which the assessee was in fact allowed excess depreciation and that it was, therefore, not possible to say that it was by reason on the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the relevant years that income chargeable to tax had escaped assessment. The notices issued under [SECTION] were, therefore, set aside by the Gujarat High Court. Before the Supreme Court, in the case of [PRECEDENT], which too was an appeal from an order rejection a writ petition to quash the notices issued under [SECTION] of the [ACT], the notices issued by the ITO were set aside.
21. In the facts and circumstances of the particular case, before us, we wonder, what exactly it was that the appellant-company was bound to disclose to the ITO, namely, the first respondent ? Was the appellant-company under a duty to point out to the first respondent the provisions of [SECTION] of the [ACT] ? Is it the duty of an assessee to teach the relevant law to the taxing authorities ? An ITO like any other person is also bound to know the law. There was no justification in law whatever for the first respondent to have issued any of the impugned notices. Neither of the two conditions which we have set out above for the applicability of [SECTION] of the [ACT] were fulfilled in the present case, and all these notices require to be quashed and set aside.
22. In the result, we allow this appeal, set aside the impugned order of the trial court, allow the appellants' writ petition and make the rule issued therein absolute in terms of prayers (a) and (b) of the petition.
23. The respondents will pay to the appellants the costs of this appeal as also of the petition in the trial court.
24. The appellants will be entitled to withdraw the amount deposited by them as security for costs.