Case: M/s. Ganga Saran and Sons Private Limited Calcutta Vs. Income Tax Officer and Others

business of the Delhi Branch of the assessee and was rendering full time service to the assessee in that capacity, it is difficult to see how any one could reasonably come to the belief that the payment of remuneration made to him was sham and bogus. Surely, the Income Tax officer could not expect Deo Datt Sharma to devote his full time and energy to the business of the Delhi Branch of the asse ssee without any remuneration whatsoever. The actual remuneration paid to Deo Datt Sharma was in fact found to be genuine and reasonable by the Appellate Assistant Commissioner while disposing of the appeal of the assessee for the asse ssment year 1949-50 as also by the Income Tax Tribunal while disposing of the appeal for the assessment year 1957- 58. It is true that Deo Datt Sharma was the brother-in-law of Ganga Saran Sharma, the managing director of the assessee, but t his circumstance cannot by any stretch of imagination lead to an inference that the payment of remuneration to Deo Datt Sharma who was solely managing and looking after the business of the Delhi Branch of the assessee was sham and bogus. Even a close relative who is in management and charge of a business on a full time basis is entitled to be paid remuneration and, in fact, it would be wholly unreasonable to expect him to work free of charge.6. The Revenue, however, relied strongly on the fact that out of the total amount of remuneration of Rs. 3, 51, 000 received by Deo Datt Sharma and credited to his account with the assessee, he had not withdrawn more than Rs. 4, 000 per year for himself and an aggregate sum of Rs. 2, 37, 55 0 was expended by him in giving a loan to Ganga Saran Sharma and making gifts to the son, wife and daughters-in-law of Ganga Saran Sharma on diverse dates between 31st July, 1957 and 26th December 1961. We fail to see how this fact can lend itself to the inference that the payment of remuneration to Deo Datt Sharma was bogus and not genuine. It is an admitted fact that Deo Datt Sharma was the brother-in-law of Ganga Saran Sharma and there is nothing unusual in Deo Datt Sharma giving a loan to Ganga Saran Sharma or making gift to the son, wife and daughters-in-law of Ganga Saran Sharma who were his close relatives. It is indeed difficult to appreciate how any inference can reasonably be drawn that the payment of remuneration t o Deo Datt Sharma was sham and bogus merely from the manner in which he expended the amount of remuneration received by him, particularly when the persons to whom he gave a loan and made gifts were his close relatives. It is possible that Deo Datt Sharma had other financial resources apart from the remuneration derived by him from the assessee and he therefore decided to give a loan and make gifts to his close relatives out of the remuneration received by him for valuable services re ndered to the assessee. In fact, if he had no other financial resources, it is extremely difficult-one might say, almost impossible-to believe that he worked for the assessee and managed and looked after the business of the Delhi Branch on a full time basis without any remuneration or in any event on a paltry remuneration of Rs. 4, 000 per year when the managing director and other directors who were working like him were getting much more from the assessee and as the proprietor of the busi ness prior to its taking over by the assessee, he was earning an average profit of about Rs. 36, 000/- per year. We are clearly of the view that on these facts the Income Tax Officer could have no reason to believe that the payment of remuneration to Deo Datt Sharma was sham and bogus and that the amount of remuneration paid to him was wrongly allowed as a permissible deduction.7. We may point out that, in fact, the statement of account of Deo Datt Sharma with the assessee for the relevant accounting year as also the previous years were with the Income Tax Officer at the time of the original assessment and these statements of account clearly showed that out of the amount of remuneration credited to his account, he had made a gift of Rs. 12, 550 to the son of Ganga Saran Sharma on 31st July 1957 and given a loan of Rs. 2, 25, 000 to Ganga Saran Sharma on 25th August, 1958 and the Income Tax Officer was fully aware that Ganga Saran Sharma was the man aging director of the assessee. It is possible and we may assume it in favour of the Revenue, that the subsequent gifts made by Deo Datt Sharma to the wife and daughters-in-law of Ganga Saran Sharma were not disclosed to the Income Tax Officer at the time of the original assessment, but these gifts being subsequent to the relevant accounting year, the assessee was not bound to disclose the same to the Income Tax Officer. Moreover, it is difficult to appreciate how the assessee could be said to be under an obligation to disclose to the Income Tax Officer in the course of its assessment as to how a director who was in sole charge of the management of the business of the assessee and who was being paid remunerati on for the services rendered by him to assessee, had utilised the amount of remuneration received by him. We do not think it possible to sustain the conclusion that the assessee omitted or failed to disclose fully and truly any material facts relating to his assessment.8. We must in the circumstances hold that neither of the two conditions necessary for attracting the applicability of section 147(a) was satisfied in the present case and the notice issued by the Income Tax Officer mu st be held to be without jurisdiction.9.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]s well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income Tax Offi cer can assume jurisdiction to issuenotice under section 147 (a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reaso n of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income Tax Officer would be without jurisdiction. The important words under section 147 (a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It mus t be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income Tax Officer in comi ng to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147 (a). It there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income Tax Officer c ould not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the no tice issued by him would be liable to he struck down ashere on the facts as admitted or found it is clear that Deo Datt Sharma was carrying on the same business prior to the incorporation of the assessee as a private limited company and this business was yielding him an average profit of about Rs. 36000 per year. When the assessee, on incorporation, took over the business as a going concern from Deo Datt Sharma it appointed Deo Datt Sharma as a director and placed him in sole charge of the management of the Delhi Branch of the business. In fact, it could not be disputed on behalf of the Revenue that Deo Datt Sharma was looking after the business of the Delhi Branch of the assessee in the same manner in which he was doing when he was sole proprietor of the business and for this work done by him, Deo Datt Sharma was paid salary at the rate of Rs. 1000 per month, commission at the rate of one per cent on the sales of the Delhi Branch and bonus equ ivalent of three months salary. The amount of remuneration paid to Deo Datt Sharma was thus not without consideration; in fact, it was paid for valuable services rendered by Deo Datt Sharma in solely managing the business of the Delhi Branch of the assessee. Now once it is conceded that Deo Datt Sharma was in sole charge and management of the business of the Delhi Branch of the assessee and was rendering full time service to the assessee in that capacity, it is difficult to see how any one could reasonably come to the belief that the payment of remuneration made to him was sham and bogus. Surely, the Income Tax officer could not expect Deo Datt Sharma to devote his full time and energy to the business of the Delhi Branch of the asse ssee without any remuneration whatsoever. The actual remuneration paid to Deo Datt Sharma was in fact found to be genuine and reasonable by the Appellate Assistant Commissioner while disposing of the appeal of the assessee for the asse ssment year 1949-50 as also by the Income Tax Tribunal while disposing of the appeal for the assessment year 1957- 58. It is true that Deo Datt Sharma was the brother-in-law ofthe managing director of the assessee, but t his circumstance cannot by any stretch of imagination lead to an inference that the payment of remuneration to Deo Datt Sharma who was solely managing and looking after the business of the Delhi Branch of the assessee was sham and bogus. Even a close relative who is in management and charge of a business on a full time basis is entitled to be paid remuneration and, in fact, it would be wholly unreasonable to expect him to work free ofRevenue, however, relied strongly on the fact that out of the total amount of remuneration of Rs. 3, 51, 000 received by Deo Datt Sharma and credited to his account with the assessee, he had not withdrawn more than Rs. 4, 000 per year for himself and an aggregate sum of Rs. 2, 37, 55 0 was expended by him in giving a loan toand making gifts to the son, wife and daughters-in-law ofon diverse dates between 31st July, 1957 and 26th December 1961. We fail to see how this fact can lend itself to the inference that the payment of remuneration to Deo Datt Sharma was bogus and not genuine. It is an admitted fact that Deo Datt Sharma was the brother-in-law ofand there is nothing unusual in Deo Datt Sharma giving a loan toor making gift to the son, wife and daughters-in-law ofwho were his close relatives. It is indeed difficult to appreciate how any inference can reasonably be drawn that the payment of remuneration t o Deo Datt Sharma was sham and bogus merely from the manner in which he expended the amount of remuneration received by him, particularly when the persons to whom he gave a loan and made gifts were his close relatives. It is possible that Deo Datt Sharma had other financial resources apart from the remuneration derived by him from the assessee and he therefore decided to give a loan and make gifts to his close relatives out of the remuneration received by him for valuable services re ndered to the assessee. In fact, if he had no other financial resources, it is extremely difficult-one might say, almost impossible-to believe that he worked for the assessee and managed and looked after the business of the Delhi Branch on a full time basis without any remuneration or in any event on a paltry remuneration of Rs. 4, 000 per year when the managing director and other directors who were working like him were getting much more from the assessee and as the proprietor of the busi ness prior to its taking over by the assessee, he was earning an average profit of about Rs. 36, 000/- per year. We are clearly of the view that on these facts the Income Tax Officer could have no reason to believe that the payment of remuneration to Deo Datt Sharma was sham and bogus and that the amount of remuneration paid to him was wrongly allowed as a permissiblemay point out that, in fact, the statement of account of Deo Datt Sharma with the assessee for the relevant accounting year as also the previous years were with the Income Tax Officer at the time of the original assessment and these statements of account clearly showed that out of the amount of remuneration credited to his account, he had made a gift of Rs. 12, 550 to the son ofon 31st July 1957 and given a loan of Rs. 2, 25, 000 toon 25th August, 1958 and the Income Tax Officer was fully aware thatma was theman aging director of the assessee. It is possible and we may assume it in favour of the Revenue, that the subsequent gifts made by Deo Datt Sharma to the wife and daughters-in-law ofere not disclosed to the Income Tax Officer at the time of the original assessment, but these gifts being subsequent to the relevant accounting year, the assessee was not bound to disclose the same to the Income Tax Officer. Moreover, it is difficult to appreciate how the assessee could be said to be under an obligation to disclose to the Income Tax Officer in the course of its assessment as to how a director who was in sole charge of the management of the business of the assessee and who was being paid remunerati on for the services rendered by him to assessee, had utilised the amount of remuneration received by him. We do not think it possible to sustain the conclusion that the assessee omitted or failed to disclose fully and truly any material facts relating to hismust in the circumstances hold that neither of the two conditions necessary for attracting the applicability of section 147(a) was satisfied in the present case and the notice issued by the Income Tax Officer mu st be held to be without jurisdiction.