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

M/s. I.B.M. World Trade Corporation, who are the appellants in Appeal No. 173 of 1982 and the respondents in Appeal No. 106 of 1982 are hereinafter referred to as "the appellant". The appellant is a Company incorporated under the laws of United States. At all material times, it carried on business in India and was declared a Company for the purposes of the IndianAct, 1922, by the Central Board of Revenue in the year 1953 which declaration still subsists. At all relevant times, the appellant was being assessed as aCompany.2. The present appeals pertain to Assessment Years4. In its returns for these Assessment Years theclaimed certain expenses which were the proportionate share of the assessee company in the expenses incurred by the Companys Headquarters at New York as well as the expenses incurred by the Area Headquarters of the Company in Manila or Tokyo. The expenses incurred at the Companys Headquarters in New York are allocated amongst its branches all over the world in such proportion as the gross revenue of the branch bears to the gross total revenue of the Company. Similarly the expenses incurred by the concerned Area Headquarters are also allocated to each of the Branches served by it in the same proportion as the branchs gross revenue to the total gross revenue earned by all the branches coming under the Area Headquarters. The Area Headquarters of the appellant at the relevant time were located first at Manila and then at Tokyo. Towards the end of 1965, an India Region Office of the Company was set up. This office, however, did not serve theduring any of the years which are relevant to the present appeals. It was set up to serve the needs of other regions in South Asia such as Sri Lanka, Bangaladesh, Nepal and Afganisthan.3. In each of the Assessment Years in question, the appellant received a statement from the Headquarters in New York showing the allocation of expenses relating to the Headquarters as well as the Area Headquarters coming to the share of the appellant. The appellant claimed in each of the Assessment Years74 expenses on the basis of the statement so received. These have been allowed by the Department while making assessment. The manner in which these expenses were so allocated to the appellant was explained to theOfficer concerned, and this method of allocation was accepted while making the assessment for the above Assessment Years. The assessment for Assessment Years74 were completed by 30th March, 1974.4. In the meanwhile, on account of an application made by the appellant to the Reserve Bank of India for remittance of Head Office Expenses to the Headquarters, New York, Reserve Bank of India, inter alia, wrote a circular letter dated 13th February, 1973 to the appellant under which they pointed out that it has been decided that the application for remittance of Head Office Expenses by branches, subsidiaries of the Company for the year 1973 onwards would be considered by the Reserve Bank of India only on production ofAssessment Orders in original showing that the amounts had been admitted by theauthority as chargeable to their revenue. The letter required the appellants to furnish to the Reserve Bank of India,Assessment Orders in original for the years prior to 1973 and also required them to furnish, inter alia, the exact formula adopted by the Company calculating the amounts together with actual calculations leading to the amount claimed for remittance. From February, 1973 onwards there is correspondence exchanged between the Exchange Control Department of the Reserve Bank of India and the appellants. The appellants furnished certain clarification by their letter dated 30th April, 1973 showing the details of the Headquarters expenses for 5 years 1967 to 1971. With this letter a statement by Mr. B.H. Withem Vice President, Finance, of the Company, enunciating the rationale behind Headquarters expenses, the composition thereof and the methodology adopted for apportioning the same were also explained. A certificate from Messrs Price Watergate authenticating the method of allocating Headquarters expenses to all the branches was also enclosed. Thereafter the Reserve Bank of India by its letter dated 7th February, 1974 asked the appellants to furnish the ratio which the Indian Branchs gross revenue in that year bore to the total gross revenue of all the branches of IBM for the year 1971. As a result, the appellants were required to go into the methodology as well as the actual figures adopted by them for the purposes of allocating expenses of the Headquarters as well as Area Headquarters to the appellants.5. Thereupon the appellants discovered that a mistake had been made in allocating area headquarters expenses to the appellants for the Assessment Years4. It seems that after the India Region Office was set up towards the end of 1965, the expenses of this office were allocated to the appellants in proportion to their income although the India Region Office did not serve the appellants at all. Instead, what should have been allocated to the appellants were the expenses of the Asian Headquarters located in Tokyo as was being done previously. As a result, a larger amount of expenses was allocated to the appellants than what should have been allocated. On discovery of this error, C.R. Williamson, President, IBM World Trade American/Far East Corporation, wrote a letter dated 1st November, 1974 to the appellants in New Delhi in which he has pointed out that it was incorrect to allocate to the appellants the expenses of the India Region Office. What should have been charged was a proportion of the Area Headquarters expenses of the Asian Pacific Headquarters located at Tokyo from which considerable support was given to India. He pointed out that on account of this error there had been anof $ 338,922. For the same reasons the allocation made to India for the yearalso had incorrect amounts included therein. In these years, however, support responsibility from Asian Pacific Headquarters ceased and, therefore, no allocation from that area was warranted. Consequently all requests for remittances of Headquarters expenses from 1971 onwards should be withdrawn and resubmitted with the correct charge. He also directed that thereturns for all these years should also be amended accordingly and all requisite steps should be taken in this behalf.6. Pursuant to these directions, the appellants by their letter dated 22nd November, 1974 made a voluntary disclosure under section 271 (4A)(ii) of the Income Tax Act, 1961 in respect of income underassessed for the Assessment Years4. This letter was addressed to the Commissioner ofBombay City II. The appellants have set out in the letter that the amount of allocated share of the Headquarters expenses claimed as tax deductible expenses for these Assessment Years was based on debit notes issued by the IBM World Trade Corporation, New York. The letter sets out in detail how, upto the end of 1965, the appellants in India used to report to the New York Headquarters through the Asian Pacific Headquarters located first at Manila and then at Tokyo. At the end of 1965, India Region Office was set up. The appellants, however, until the end of 1970 continued to draw support from Asian Pacific Headquarters. An error in principle had arisen in allocation of expenses in that India Region Office Expenses had been allocated to India rather than the Area Headquarters expenses which should have been correctly charged. As a result, there had been an excess charge of Headquarters expense allocable to India of Rs. 61,19,092/for the years 1966 to 1972. A yearwise break down was also annexed to the letter. In addition, the findings of a detailed examination carried out in New York were also annexed. The letter pointed out that the errors had arisen inadvertently and a full disclosure was being made voluntarily immediately on the determination of the full facts. The letter requested waiver of penalty under section 271(4A)(ii) of the Income Tax Act, 1961. Amended returns for the years 1966 to 1972 were also submitted and a self assessment of the tax payable was made and the tax amount of Rs. 49,29,148/was also enclosed.7. Nothing was heard from the Commissioner of Income Tax thereafter. However, the appellants received notices from the Income Tax Officer under section 148 of the Income Tax Act for the Assessment Years4, all dated 5th January, 1976. On an enquiry by the appellants, the Inspecting Assistant Commissioner clarified to the appellants that the notices under section 148 were issued to regularise the voluntary returns filed by the assessee along with voluntary disclosures under section 271(4A) of the Income Tax Act, 1961 on November 22, 1974. This is recorded in the appellants letter to the Inspecting Assistant Commissioner dated 9th February, 1976. The appellants, by their further letter dated 2nd March, 1976 addressed to the Inspecting Assistant Commissioner, have again referred to the discussion which they had with him and have submitted that the returns already filed with the Department on November 22, 1974 should be treated as returns in respect of their said notices under section 148. Thereafter the appellant received a notice under section 148 for the Assessment Yeardated 18th March, 1976. They also received notices under section 148 for the Assessment Years67 all dated 10th October, 1976.8. On account of a series of letters/notices received by the appellants from the department requiring them to furnish details of accounts, expenditure, exports, imports, cost structure etc., for the Assessment Years4, the appellants filed in this Court Misc. Petition No. 174 of 1978 on 16th February, 1978 which has been disposed of by a learned Single Judge of this Court by his impugned order. The learned Judge, by his judgment and order dated 1st September, 1981 has partly allowed the petition. He has set aside the notices under section 148 for the Assessment Years7. He has, however, upheld the notices under section 148 pertaining to the Assessment Years4. The appellants have preferred Appeal No. 173 of 1982 from the judgment of the learned Single Judge in so far as the judgment upholds notices under section 148 for the Assessment Years4. The Department has filed Appeal No. 106 of 1982 from the judgment of the learned Single Judge in so far as it sets aside the notices under section 148 pertaining to the Assessment Years

Reasoning:
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.