Important Point
The notices issued u/s. 148 of Income Tax Act are liable to be quashed as they are vague. The two letters appear to be hardly a ground for ITO to reopen the assessment. The High Court erred in not exercising its jurisdiction when the facts were all there and law clear on the subject. The impugned judgment of the High Court is set aside and appeals are allowed with costs.

Headnote:Income Tax Act, 1961-Sections 148 r/w 147 (a) and (b)-Reopening of completed assessments by I.T.O. on the basis of two letters dated May 4, 1973 and Nov. 6, 1974 of the Department of Economic Affairs-Whether correct?-(No)-Two grounds of re-opening assessment-First, wrongly deduction of foreign exchange losses-Second, the said letters laying down the ceiling on remittances on account of Home Office expenses and service charges expenses when in the assessment orders excess deductions on these two counts had been permitted than allowed by these two letters-Whether are sound grounds for I.T.O. to re-open the assessment? - (No) - Whether High Court erred in not exercising its jurisdiction?-(Yes)-Effect.
       Held : The High Court quashed the notices under Section 148 of the Act for all the six years (assessment years 1967-68 to 1969-70 and 1971-72 to 1973-74) so far as they were based on the first ground, viz., wrongly deduction of foreign exchange loss. The High Court was of the view that the Income-tax Officer sought to re-open the assessment on this point which was already concluded and held that condition precedent that re-assessments under Section 147(a) of the Act were satisfied. The High Court noticed that on this first ground record would show that the Income-tax Officer in re-opening the assessment was in fact really seeking to re-open the issue which was the subject matter of assessment proceeding for the assessment year 1967-68, which was decided against the Revenue right upto the stage of the Appellate Tribunal and that even reference under Section 256(2) of the Act was refused by the High Court. The Revenue did not take up the matter further to the Supreme Court. In the assessment year 1967-68 the appellant had claimed losses on exchange by re-translation in terms of US Dollars which though disallowed by the Income-tax Officer were allowed by the Income Tax Appellate Tribunal. Further proceedings taken by the Revenue by way of appeal and reference were decided against the Revenue. The assessments, which therefore stood concluded on the same facts and law on the subject, would not be re-opened as no condition existed requisite for re-opening the concluded assessment. After the assessment for the assessment year 1967-68 became final the Income-tax Officer continued to allow the loss on exchange for subsequent years. The High Court said that it was obvious that the Income-tax Officer was fully aware of the particular system of accounting being followed by the appellant. It is not necessary to refer to other reasons given by the High Court in questioning the notices issued under Section 148 on the first ground as we find that against this part of the judgment of the High Court Revenue had come up to this Court in special leave petition, which was dismissed. What, however, is surprising that in spite of the fact that first ground was the only ground given by the Income-tax Officer for re-opening the assessment for the assessment years 1967-68 to 1969-70 and the High Court had quashed the notices under Section 148 of the Act yet the writ petitions pertaining to these three years were dismissed. In spite of the fact having been brought to the notice of the High Court in the review petitions filed by the appellant by force the appellant had filed the appeals in respect of these three assessment years as well. (Para 11)
       Further held : The second ground for reopening the assessments for the assessment years 1971-72, 1972-73 and 1973-74 are these two letters dated May 4, 1973 and November 6, 1974 of the Department of Economic Affairs in the Ministry of Finance, Government of India, allegedly laying down the ceiling on remittances on account of Home Office expenses and service charges expenses when in the assessment orders excess deductions on these two counts had been permitted than allowed by these two letters. It is thus the claim of the revenue that to that extent the income has escaped assessment on account of over deduction of head office expenses and service charges. If we see these two letters there appears to be hardly a ground for Income-tax Officer to reopen the assessment. (Para 13)
       It is difficult to appreciate how a Government decision of a later dated originating from a different department exercising powers under separate law could be used to reopen already completed assessments on the ground that it is “in consequence of information in his (Income-tax Officer) possession”. (Para 14)
       If any remittance of foreign exchange having been made in excess of prescribed limit from January 1, 1969 that will be for the Reserve Bank or the Central Government to take action or to grant permission as may be provided under the Foreign Exchange Regulation Act, 1973. That, however, cannot be a ground for the Income-tax Officer to assume jurisdiction to start re-assessment proceedings either under Section 147(a) or 147(b) of the Act on the ground that will so “in consequence to information” in his possession in the shape of these two letters. Whatever amount be payable in respect of Home Office expenses or service charges by the Indian branch to its principal office abroad as allowed by the Income-tax authorities under the Income-tax Act, remittance can only be permitted under the provisions of the Foreign Exchange Regulation Act by the Reserve Bank of India. Both Acts-Income Tax Act and Foreign Exchange Regulation Act-operate in different fields. (Para 16)
       We may also notice that when notices under Section 148 of the Act were issued, these did not specify whether action was being contemplated under clause (a) or clause (b) of Section 147 of the Act. Notices merely said that “there was reasons to believe that the income of the assessee in respect of which it was assessable/chargeable to tax for the assessment years in question had escaped assessment” within the meaning of Section 147 of the Act. In view of the decision of this Court in Kantamani Venkata Narayana & Sons v. First Additional Income-Tax Officer [(1967) 63 ITR 638] it is neither necessary nor imperative that a notice under Section 147 of the Act must specify under which of the two clauses (a) or (b) it has been issued. (Para 17)
       Held : Thus in this view of the matter the two letters were wholly irrelevant and could not be treated as an information to the Income-tax Officer to initiate re-assessment proceeding. We are, therefore, of the opinion that there was inherent lack of jurisdiction in the Income-tax Officer to issue notices under Section 148 of the Act on the basis of any income of the appellant escaping asssessment either under clause (a) or clause (b) of Section 147 of the Act. All the notices under Section 148 of the Act are quashed. (Para 18)
       Held finally : Impugned judgment dated 18th December, 1984 of the High Court of Delhi is set aside and the appeals are allowed the costs. (Para 19)

Judgment

D.P. Wadhwa, J.-These appeals are from the judgment dated December 18, 1984 of Division Bench of the Delhi High Court dismissing writ petitions of the appellant for various assessment years. In these writ petitions, the appellant had challenged notices issued under Section 148 of the Income Tax Act, 1961 (for short, the ‘Act’). Civil Appeal 4074/85 pertains to assessment year 1969-70 and CAs 4075/85 and 4076/85 to assessment year 1967-68 and 1968-69 respectively. Civil Appeal 1089/85 pertains to 3 assessment years-1971-72, 1972-73 and 1973-74. For the assessment year 1970-71, there are two appeals and these are CAs 1090/95 and 1091/85. While for each assessment year there was separate writ petition in the High Court, for assessment year 1970-71, there were two. Reason for two writ petitions for the assessment year 1970-71 was that while the first writ petition challenged the notice under Section 148 of the Act, second was filed as by that time the Income Tax Officer had completed the assessment and, thus, there was a challenge to the assessment itself.

2. The appellant is a wholly owned subsidiary of the Coca-Cola Company which is a company incorporated under the laws of the United States of America having its headquarters at Atlanta, Georgia, U.S.A. The appellant has its main office at New York referred to as the “home office”. The appellant had a branch office At New Delhi which had been declared as a company under Section 2(17) (iv) of the Act by the Central Board of Direct Taxes. It is being assessed to income-tax as a non-resident company in India since it was established in the year 1958. The Coca-cola Company, the holding company, manufactures certain basic ingredients like `7x’ for the manufacture of Coca-cola concentrate and other beverage bases in its factories in U.S.A. and in London. These basic ingredients are sold by the holding company exclusively to the appellant for further manufacture of Coca-cola concentrate and beverage bases for its branches numbering 23 spread in various countries including that in India.

3. For the administrative convenience the whole area of operation of the appellant had been divided into four zones and 14 areas with district and regional offices. Different branches of the appellant including the Indian branch export their products to different countries and for that necessary services which are required are rendered by the district and regional offices. The branch offices have no staff or any other arrangement to render services to the purchasers of their products. These district and regional offices have no income of their own and the expenses they incur are termed as services charges and are borne by different branches of the appellant. There are thus Home Office expenses and the service charges by the zonal and area offices and also the district and regional offices. These are, as per report of the auditor, are distributed pro-rata basis on different branches on the basis of their exports and are met by the branches in US Dollars. The Indian branch primarily maintains accounts in respect of its liability for payment of pro-rated Home Office expenses and service charges in US Dollars as the liability is to be discharged in US Dollars only. At the same time the Indian branch also maintains accounts in respect of these liabilities in rupees as the accounts of the business carried on by it are generally in rupees. It is stated that this practice of pro-rating Home Office expenses and service charges is followed by multinational companies having branches in different countries and is an international accepted practice.

4. The Income-tax Officer accepted the system followed by the Indian branch for pro-rating the Home Office expenses and service charges for the assessment years 1959-60 to 1966-67. For the assessment year 1967-68 the Income-tax Officer re-examined afresh the claim of the Indian branch for deduction of pro-rated Home Office expenses and service charges. The Inco

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1998 Supreme(SC) 409

Cases Referred (2)