SMT. SUJATA MANOHAR, J. :
M/s. I.B.M. World Trade Corpn., 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 Indian IT Act, 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 a non-resident company.
2. The present appeals pertain to asst. yrs. 1959-60 to 1973-74. In its returns for these assessment years the appellant-company claimed 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 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 branches 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 the appellant-company during 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 the headquarters as well as the area headquarters coming to the share of the appellant. The appellant claimed in each of the asst. yrs. 1959-60 to 1973-74 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 the ITO concerned, and this method of allocation was accepted while making the assessment for the above assessment years. The assessments for asst. yrs. 1959-60 to 1973-74 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 dt. 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 of IT assessment orders in original showing that the amounts had been admitted by the IT authority as chargeable to their revenue. The letter required the appellants to furnish to the RBI, IT 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 calculation 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 RBI and the appellants. The appellants furnished certain clarification by their dt. 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 M/s. Price Watergate authenticating the method of allocating headquarters expenses to all the branches was also enclosed. Thereafter the RBI by its letter dt. 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 headquarters to the appellants.
5. Thereupon the appellants discovered that a mistake has been made in allocating area headquarters expenses to the appellants for the asst. yrs. 1967-68 to 1973-74. 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, G. R. Williamson, President, IBM World Trade America/Far East Corporation, wrote a letter dt. 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 an over-remittance of Pounds 338,922. For the same reasons the allocation made to India for the year 1971-72 also 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 the IT returns 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 dt. 22nd November, 1974 made a voluntary disclosure under s. 271(4A)(ii) of the IT Act, 1961 in respect of income underassessed for the asst. yrs. 1967-68 to 1973-74. This letter was addressed to the CIT, Bombay 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 Corpn., 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 expenses 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 s. 271(4A)(ii) of the IT 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 CIT thereafter. However, the appellants received notices from the ITO under s. 148 of the IT Act for the asst. yrs. 1967-68 to 1973-74, all dt. 5th January, 1976. On an enquiry by appellants the IAC clarified to the appellants that the notices under s. 148 were issued to regularise the voluntary returns filed by the assessee along with voluntary disclosure under s. 271(4A) of the IT Act, 1961 on 22nd November, 1974. This is recorded in the appellants letter to the IAC dt. 9th February, 1976. The appellants, by their further letter dt. 2nd March, 1976 addressed to the IAC, have again referred to the discussion which they had with him and have submitted that the returns already filed with the Department on 22nd November, 1974 should be treated as returns in respect of their said notices under s. 148. Thereafter the appellant received a notice under s. 148 for the asst. yrs. 1960-61 to 1966-67 all dt. 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 asst. yrs. 1959-60 to 1973-74, 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 dt. 1st September, 1981 has partly allowed the petition. He has set aside the notice under s. 148 for the asst. yrs. 1959-60 to 1966-67. He has, however, upheld the notices under s. 148 pertaining to the asst. yrs. 1967-68 to 1973-74. 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 s. 148 for the asst. yrs. 1967-68 to 1973-74. 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 s. 148 pertaining to the asst. yrs. 1959-60 to 1966-67.
9. Sec. 147 as it stood at the material time was as follows :
'If -
(a) the Assessing Officer has reason to believe that, by reason of the omission of failure on the part of an assessee to make a return under s. 139 for any assessment year to the Assessing Officer or 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, or
(b) notwithstanding that there has been no omission or failure as mentioned in cl. (a) on the part of the assessee, the Assessing Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,
he may, subject to the provisions of ss. 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in ss. 148 to 153 referred to as the relevant assessment year).
Explanation 1. For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :
(a) where income chargeable to tax has been under-assessed; or
(b) where such income has been assessed to too low a rate; or
(c) where such income has been made the subject of excessive relief under this Act or under the Indian IT Act, 1922 (11 of 1922); or
(d) where excessive loss or depreciation allowance has been computed.
Explanation 2 : Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of this section.'
Sec. 148 as it stood at the relevant time was as follows :
'(1) Before making the assessment, reassessment or recomputation under s. 147, the Assessing Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under sub-s. (2) of s. 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under the sub-section.
(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.'
Under s. 151 as it stood at the relevant time, it was provided as follows :
'(1) No notice shall be issued under s. 148 after the expiry years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for the issue of such notice.
(2) No notice shall be issued under s. 148 after the expiry of four years from the end of the relevant assessment year, unless the Chief Commissioner or Commissioner is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for the issue of such notice.'
In the present case, notices under s. 148 have been issued in view of the Assessing Officer having reason to believe that the appellant/assessee has failed to disclose fully and truly all material facts necessary for his assessment for the years concerned, that is to say, under s. 147(a) of the IT Act, 1961 as it stood at the relevant time.
10. Now, for the asst. yrs. 1959-60 to 1966-67, 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 s. 148(2) reasons are required to be recorded by the assessing authority for reopening any assessment. These were produced before the learned single Judge and are annexed to the affidavit in rejoinder of the appellants dt. 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 the appellant-assessee. It 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 s. 148 of the IT Act, 1961 for the assessment years.
12. In respect of asst. yrs. 1967-68 to 1973-74 there was admittedly an error on the part of the New York headquarters of the appellants-company in 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 RBI 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 material facts.
14. The assessee is under an obligation to disclose only all basic facts. The assessee cannot be expected to draw any inference or to disclose any inference to be made from these basic facts. In the case of Indian Oil Corpn. vs . ITO : [1986]159ITR956(SC) the Supreme Court considered a case where the facts were very similar to the facts which are before us. In that case the assessee was a company incorporated in U.K. It had its principal place of business in Assam. The assessee claimed deduction of certain expenses as administrative charges incurred by the assessee-company in London for management and secretarial work carried on, on behalf of the assessee in London. The expenses represented approximately 40% of the total composite management expenses of the company in London covering these expenses in respect of their management and secretarial work of all its branches. This was done in the asst. yr. 1954-55 and onwards. In the asst. yr. 1954-55 the ITO called for an auditors report regarding the reasonableness of the allocation of such expenses. But nothing further seems to have been done. For the asst. yr. 1963-64, the assessee furnished a certificate from the London auditor which revealed that reasonable charges allocable to the assessee would be about 10% of the total administrative expenses incurred by the headquarters from London. The assessee was asked to produce similar certificates for the asst. yrs. 1957-58, 1958-59 and 1959-60 and on his failing to produce the same, the ITO issued notices under s. 147(a) for reopening the assessments for those years. The Supreme Court held that the assessee has all along disclosed and the Revenue was aware that London management expenses were incurred on behalf of the assessee by the company in London which incurred such expenses for the assessee as well as other allied companies. The fact of allocation of a portion of these expenses to the assessee was known all along to the Revenue. The nature and quantum of work done was disclosed; whether the allocation was excessive or not was an inferential fact. The Court said that simply because auditors opined for the asst. yr. 1963-64, that ten per cent would be a reasonable charge, it could not be said that the assessee had failed to disclose fully and truly all basic facts at the time of the original assessment. There was no evidence or allegation that such an opinion was available with the assessee at or before the time of the original assessment. All the basic facts in this case were disclosed. Therefore, it could not be said that there was failure to disclose fully and truly all basic facts. The Court said, 'To confer jurisdiction under cl. (a) of s. 147 to reopen an assessment beyond the period of four years but within a period of eight years from the end of the relevant year, two conditions are required to be fulfilled : the first is that the ITO must have reason to believe that the income, profits or gains chargeable to tax, had been underassessed or escaped assessment; the second is that he must have reason to believe that such escapement or underassessment was occasioned by reason of the assessees failure to disclose fully and truly all material facts necessary for the assessment of that year. Both these conditions are conditions precedent to be satisfied'. The ratio of this judgment directly applies to the present case also where the assessee had disclosed all basic facts in its possession at the time of the original assessments. It was not aware of the inadvertant error in calculation. Hence, there was no question of the appellant/assessee not disclosing such an error. In the case of Calcutta Credit Corpn. Ltd. vs . ITO : [1971]79ITR483(Cal) also a similar ratio has been laid down.
15. Moreover, the assessee must be aware of those facts which are not disclosed before it can be said that there is any omission or failure on his part to disclose the same. In the case of CIT vs . Balvantrai S. Jain : [1969]72ITR59(Bom) , the Bombay High Court held that the assessee cannot be said to have failed to disclose the facts in question as he had no knowledge of these facts. It interpreted s. 34(1)(a) of the IT Act, 1922 which is in pari materia with the present s. 147(a) and held that s. 34(1)(a) covers only cases where the assessee, knowing all the material facts, deliberately withholds information. The section cannot apply to a case where the assessee was not aware of the facts which he was supposed to disclose.
16. There are similar observations in the case of Sampat Ram Budhmal Dugar vs . CWT . The Court there dealt with s. 17(1)(a) of the WT Act, 1957, which is also in pari materia with s. 147(a) of the IT Act, 1961. The Court said that omission or failure to disclose fully or truly any material fact postulates the knowledge of this fact at the relevant time. A person cannot be held guilty of omission or failure to disclose a fact of which he had no knowledge.
17. It is sought to be argued by Dr. Balasubramaniam on behalf of the Department that in the present case the assessee must be considered to have been aware of the error because the appellant-company at New York is a very large world-wide organisation having expert accountants and auditors. Hence one should not accept that the accounts department committed any error in calculating the allocation of expenses or that such error came to light only in November, 1974. This contention raised for the first time in these proceedings. In the reasons which are set out for opening the assessment for the years 1967-68 to 1973-74, 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 reasons 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 dt. 22nd November, 1974 the assessee had voluntarily disclosed to the CIT the error in calculation of headquarters expenses. The excess debit has arisen because large expenses of the region Officer rather than the area Officer 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 s. 148 in respect of these assessment years. The contention of Dr. Balasubramaniam 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 s. 148 by virtue of the provisions of s. 148(2) at the relevant time. Only the reason so recorded can be looked at for sustaining or setting aside a notice issued under s. 148. In the case of Equitable Investment Co. (P.) Ltd. vs . ITO : [1988]174ITR714(Cal) a Division Bench of the Calcutta High Court has held that where a notice issued under s. 148 of the IT Act, 1961, after obtaining the sanction of the CIT, 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 CIT has been obtained. The IT 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 IT Department giving some additional reasons. In the present case, the reasons which are given by the IAC for reopening the assessments which are annexed to the affidavit in rejoinder of the appellants are to the effect that in respect of the asst. yrs. 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 provision of s. 147(a) are not attracted.
19. It is also contended by the appellants that the sanction which is granted by the Commissioner for asst. yrs. 1967-68 to 1973-74 under s. 151 of the IT 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 vs . S. P. Chaliha : [1971]79ITR603(SC) , where the Supreme Court on the facts before it held that the ITO had not even come to a prima facie conclusion that the loan transactions to which he referred were not genuine transactions. His conclusion 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 that word yes and affixed 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 s. 148 have been issued without the provisions of s. 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 CIT vs . Sun Engineering Works P. Ltd. : [1992]198ITR297(SC) , where various conflicting decision of different High Court have been examined. We need not go into this question because in any event the notices for asst. yrs. 1967-68 to 1973-74 are required to be set aside because they do not comply with the requirement of s. 147(a) of the IT Act, 1961.
21. In the premises, the appeal of the Department being Appeal No. 106 of 1982 is dismissed with costs while the appeal of the appellant/assessee being Appeal No. 173 of 1982 is allowed and the judgment of the learned single Judge is partly set aside to the extent that it deals with the notices under s. 148 for the asst. yrs. 1967-68 to 1973-74. Appeal No. 173 of 1982 is allowed with costs.
22. We would like to point out that in the appeal paper-book filed by the Department in Appeal No. 106 of 1982 an uniformed 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 appeal paper-book which 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 dt. 11th April, 1978 and the affidavit of S. K. Tyagi dt. 12th September, 1980.
23. Since the appeals are finally disposed of, all interlocutory orders in the appeal come to an end.
24. Dr. Balasubramaniam applies for leave to appeal to Supreme Court. In our view, no important question of law of public importance arises in these appeals. Hence leave is refused.