Case: N.D. Bhatt, Inspecting Assistant Commissioner of Income Tax and Another Vs. I.B.M. World Trade Corporation

22nd November, 1974 the assessee had voluntarily disclosed to the Commissioner of Income-tax the error in calculation of headquarters expenses. The excess debit has arisen because larger expenses of the region office rather than the area office have been taken into account. The assessee has voluntarily disclosed this error on learning of it, has calculated the excess income and paid tax on self assessment on this additional income. All this was done long prior to the notices being issued to the assessee under section 148 in respect of these Assessment Years. The contention of Dr. Balasubramniam in this connection is, therefore, without merit.18. It is also well settled that the reasons for reopening are required to be recorded by the assessing authority before issuing any notice under section 148 by virtue of the provisions of section 148(2) at the relevant time. Only the reasons so recorded can be looked at for sustaining or setting aside a notice issued under section 148. In the case of (Equitable Investment Co. (P.) Ltd. v. Income-tax Officer)5, reported is 174 I.T.R. page 714, a Division Bench of the Calcutta High Court has held that where a notice issued under section 148 of the Income-Tax Act, 1961, after obtaining the sanction of the Commissioner of Income-tax, is challenged, the only document to be looked into for determining the validity of the notice is the report on the basis of which the sanction of the Commissioner of Income-tax has been obtained . The Income-tax Department cannot rely on any other material apart from the report. In the case before it, the Calcutta High Court refused to take into consideration the affidavit filed by the Income-Tax Department giving some additional reasons. In the present case, the reasons which are given by the Inspecting Assistant Commissioner for re-opening the assessments which are annexed to the affidavit in rejoinder of the appellants are to the effect that in respect of the assessment years 1967-68 to 1973-74 there are errors in the principle of allocating headquarters expenses to India which have been deducted. The net effect is that there has been an excess charge of headquarters expenses allocated to India. Each of the notices sets out the relevant error for the accounting year. The reasons, therefore, do not indicate in any manner any deliberate omission or suppression of any fact or of this error, on the part of the assessee at the time of the original assessment. Nor do these reasons allege that the assessee was in possession of the facts which it has failed to prove. In these circumstances, the provisions of section 147(a) are not attracted.19. It is also contended by the appellants that the sanction which is granted by the Commissioner for Assesment Years 1967-68 to 1973-74 under section 151 of the Income-tax Act, 1961 is without any application of mind, because below the reasons so disclosed it is found that the sanctioning authority has merely said `yes. According to the appellants, looking to the reasons set out, it should have been clear to the sanctioning authority that there was no failure or omission on the part of the assessee to disclose any material fact. Had the sanctioning authority applied its mind, it would not have given such a sanction. The appellant/assessee relied on the decision in the case of (Chhugamal Rajpal v. S.P. Chaliha)6, reported in 79 I.T.R. page 603, where the Supreme Court on the facts before it held that the Income-tax Officer had not even come to a prima facie conclusion that the loan transactions to which he referred were not genuine transactions. His conclusions that there was a case for investigating the truth of the alleged transactions was not the same thing as saying that there were reasons for the issue of the notice. The Commissioner had mechanically accorded permission for issue of notice. In that case also the Commissioner had merely added the word `yes and fixed his signature. The Court came to the conclusion that the Commissioner had not applied his mind. We are not willing to read this case as laying down that where the Commissioner only adds a word `yes, he has not applied his mind. This will depend upon the facts and circumstances of each case. In the present case, however, looking to the reasons which have been recorded and which were before the Commissioner, there is nothing which would indicate that there was any omission on the part of the assessee to furnish any material facts. In fact the reasons themselves describe this so-called omission and failure as an inadvertant error in the principle of allocating expenses. In these circumstances, the sanction ought not to have been given by the Commissioner. But we need not press this aspect of the case in support of our conclusion in view of our finding that in any case, the notices under section 148 have been issued without the provisions of section 147(a) being attracted to the facts and circumstances of the case.20. The appellant/assessee has also objected to the large number of queries raised by the assessing authority in the course of the assessment which clearly indicate that the entire assessment on all aspects was being reopened for each of the assessment years. The appellant/assessee has submitted that when the reassessment is on a specific ground, the reassessment should ordinarily be confined to determine the income which has escaped assessment. It was submitted that the entire assessment could not have been reopened by the department in any event. The appellant/assessee has relied upon the decision of the Supreme Court in the case of (Commissioner of Income-tax v. Sun Engineering Works P. Ltd.)7, reported in 198 I.T.R. Page 297, where various conflicting decisions of different High Court have been examined. We need not go into this question because in any event the notices for Assessment Years 1967-68 to 1973-74 are required to be set aside because they do not comply with the requirement of section 147(a) of the Income-tax Act, 1961.

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

Explanation:
0[ds]10. Now, for the Assessment Years7, there was no error on the part of the assessee in claiming a deduction on account of Headquarters expenses. The same were correctly computed. So there was no omission or failure on the part of the assessee to disclose material facts. Under section 148(2) reasons are required to be recorded by the assessing authority forany assessment. These were produced before the learned Single Judge and are annexed to the affidavit in rejoinder of the appellants dated 28th August, 1989 in the writ petition. The assessing authority has referred to the fact that the assessee has admitted an excess charge of Headquarters expenses allocated to the appellants amounting to Rs. 61.19 lakhs for the accounting years 1968 to 1972. The Assessing Officer goes on to state that it has come to his knowledge that the Headquarters expenses claimed by the assessee are not based on actual service or benefits obtained by the assessee but are based on the ratio of Indian Branchs turnover to the world turnover of the branches and subsidiaries and in view thereof he has reopened assessments for the said period.11. In respect of Accounting Years 1968 to 1972 the learned Judge, in our view, has rightly come to the conclusion that the assessing authority was informed by the assessee about the basis and the method of allocation of headquarters expenses to theIt was aware of the method of allocating expenses at the time of making the assessment orders for these assessment years. The reasons show merely a change of opinion on the part of the assessing authority. In these circumstances, it cannot be held that there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment for these years. We agree with the reasoning and conclusion arrived at by the learned Judge for quashing the notices served on the assessee under section 148 of the Income Tax Act, 1961 for these Assessment Years.12. In respect of Assessment Years74 there was admittedly an error on the part of the New York Headquarters of thein calculating the expenses allocated to the appellants in India. This mistake was discovered for the first time in 1974 when the appellants headquarters in New York were required to make detailed calculations to supply the information sought by the Reserve Bank of India for remittance of the expenses from India to New York. We have already referred to the nature of the error. The facts show that the error was inadvertant. When the new India Region Office opened at the end of 1965, the Headquarters erroneously allocated to the appellants, the expenses of India Region Branch instead of the Area Headquarters.13. In these circumstances, can it be said that there has been any failure or omission on the part of the assessee to disclose fully and truly all material facts In the first place, there is no doubt that the assessee had disclosed to the assessing authority the method of calculating the Headquarters expenses which were allocated to the appellant. Therefore, the assessing authorities were fully aware of the fact that the assessee was claiming Headquarters expenses on the basis of debit notes given to them by the Headquarters at New York and that these debit notes were based on the calculation of expenses to be allocated to the assessee on a pro rata basis as set out earlier. If the department wanted any further particulars regarding these calculations or any details in connection with the debit notes so furnished, it could have asked the assessee to furnish such details. In fact, the Department did ask the assessee for such particulars which were in fact furnished to the Department. It is an accepted position that neither the appellant/assessee nor the Department realised that the figures pertaining to India Region Office should not have been submitted and instead, figures pertaining to the Area Headquarters should have been submitted. There was, therefore, no omission or failure to disclose any materialcontention is raised for the first time in these proceedings. In the reasons which are set out for reopening the assessment for the years4, it is nowhere mentioned that the error in calculation was throughout known to the assessee and that information regarding wrong calculation of headquarter expenses allocated to the assessee was deliberately withheld by the assessee. Not only is this not recorded as a reason for reopening the assessment, but the documents which are before us in these proceedings all indicate to the contrary and we have no reason to disbelieve these documents. It is quite clear that by the letter dated 22nd November, 1974 the assessee had voluntarily disclosed to the Commissioner ofthe error in calculation of headquarters expenses. The excess debit has arisen because larger expenses of the region office rather than the area office have been taken into account. The assessee has voluntarily disclosed this error on learning of it, has calculated the excess income and paid tax on self assessment on this additional income. All this was done long prior to the notices being issued to the assessee under section 148 in respect of these Assessment Years. The contention of Dr. Balasubramniam in this connection is, therefore, without merit.18. It is also well settled that the reasons for reopening are required to be recorded by the assessing authority before issuing any notice under section 148 by virtue of the provisions of section 148(2) at the relevant time. Only the reasons so recorded can be looked at for sustaining or setting aside a notice issued under section 148. In the case of (Equitable Investment Co. (P.) Ltd. v.Officer)5, reported is 174 I.T.R. page 714, a Division Bench of the Calcutta High Court has held that where a notice issued under section 148 of theAct, 1961, after obtaining the sanction of the Commissioner ofis challenged, the only document to be looked into for determining the validity of the notice is the report on the basis of which the sanction of the Commissioner ofhas been obtained . TheDepartment cannot rely on any other material apart from the report. In the case before it, the Calcutta High Court refused to take into consideration the affidavit filed by theDepartment giving some additional reasons. In the present case, the reasons which are given by the Inspecting Assistant Commissioner forreopening the assessmentswhich are annexed to the affidavit in rejoinder of the appellants are to the effect that in respect of the assessment years74 there are errors in the principle of allocating headquarters expenses to India which have been deducted. The net effect is that there has been an excess charge of headquarters expenses allocated to India. Each of the notices sets out the relevant error for the accounting year. The reasons, therefore, do not indicate in any manner any deliberate omission or suppression of any fact or of this error, on the part of the assessee at the time of the original assessment. Nor do these reasons allege that the assessee was in possession of the facts which it has failed to prove. In these circumstances, the provisions of section 147(a) are notconclusions that there was a case for investigating the truth of the alleged transactions was not the same thing as saying that there were reasons for the issue of the notice. The Commissioner had mechanically accorded permission for issue of notice. In that case also the Commissioner had merely added the word `yes and fixed his signature. The Court came to the conclusion that the Commissioner had not applied his mind. We are not willing to read this case as laying down that where the Commissioner only adds a word `yes, he has not applied his mind. This will depend upon the facts and circumstances of each case. In the present case, however, looking to the reasons which have been recorded and which were before the Commissioner, there is nothing which would indicate that there was any omission on the part of the assessee to furnish any material facts. In fact the reasons themselves describe thisomission and failure as an inadvertant error in the principle of allocating expenses. In these circumstances, the sanction ought not to have been given by the Commissioner. But we need not press this aspect of the case in support of our conclusion in view of our finding that in any case, the notices under section 148 have been issued without the provisions of section 147(a) being attracted to the facts and circumstances of theneed not go into this question because in any event the notices for Assessment Years74 are required to be set aside because they do not comply with the requirement of section 147(a) of the2. We would like to point out that in the appealfiled by the Department in Appeal No. 106 of 1982 an unaffirmed affidavit in reply on behalf of the Department is annexed at pages 162 to 228 which affidavit is not on record and does not appear to have been filed in Court before the learned Single Judge or before us. Similarly there is an extract under the heading `Press Commission at page 139 which also appears to be an extra addendum inserted in the appealwhich was not before the learned Single Judge. These two documents are required to be ignored. The only affidavits which are filed by the Department are the affidavit of N.D. Bhatt dated 11th April, 1978 and the affidavit of S.K. Tyagi dated 12th September, 1980.