1. These are 12 appeals by the assessee M/s. Iraqi Airways against three sets of orders passed by the Commissioner of Income-tax (Appeals), one relating to the assessment years 1970-71, 1971-72, 1972-73 and 1973-74, second relating to 1974-75, 1975-76, 1976-77, 1977-78 and 1979-80 and third relating to 1980-81 and 1981-82. The issues involved in all these appeals are common and, therefore, all the appeals have been heard together and common arguments have been addressed to us by both the parties.
2. We may produce the grounds taken which are common for all the years :- 1. That the Commissioner of Income-tax (Appeals) erred in law in holding that the assessee which was a Sovereign State was a 'person' within the meaning of Section 2(31) of the Act hence liable to taxation under the Act." 2. "That the Commissioner of Income-tax (Appeals) erred in law in holding that the proceedings initiated Under Section 139(2)/148 of the Act were valid in spite of the fact that no notice under these sections was served upon the appellant or any of its alleged members or agent." 3. "That the Commissioner of Income-tax (Appeals) erred in confirming the status of the appellant as an A.O.P." 4. "That the Commissioner of Income-tax (Appeals) erred in directing the Inspecting Assistant Commissioner of Income-tax (Asst.) to compute the income of the appellant by applying Rule 10(i) of the Income-tax Rules, 1962 and estimating the net income @ 7.5% of its Indian turnover and in not allowing depreciation & carry forward of loss Except for the assessment years 1980-81 and 1981-82 the earlier assessments had been made by initiating the proceedings Under Section 139(2) read with Section 148 of the Income-tax Act. Extensive arguments were advanced by the learned counsel for the assessee and we divide his arguments into three parts. Firstly, he submitted that M/s. Iraqi Airways was not assessable to Indian Income-tax, as it was a Department of the Iraqi Government and the income of a foreign Government could not be taxed here. According to his submission, the Iraqi Government could not be considered to be a 'person' for the purpose of assessment under the Income-tax Act and its income was immune from taxation in any foreign country including India. Secondly, it was submitted that notices Under Section 148 or 139(2) had not been validly served, thus vitiating the proceedings in all the years. According to the submission, the notices were not served on the assessee or its duly authorised representatives but on certain other persons who had no authority to receive such notices. Thirdly, it was submitted that the quantum of income assessed was excessive and illegal and whereas the Income-tax Officer while determining the income under Rule 10(ii) of the Income-tax Rules, 1962 had not considered allowable depreciation, the CIT (Appeals) discarded that method and determined the income under Rule 10(i) of the Income-tax Rules. This, according to him, was not correct.
3. The learned counsel for the assessee made detailed submissions on the first point and drew our attention to the fact that in 1981 M/s.
Iraqi Airways had filed writ petitions before the High Court but later on these petitions had become infructuous when the ex parte assessments had been set aside. He, however, relied on the submissions made in the writ petition and wanted those sub-missions to be considered for determining the issue regarding the status of the assessee. It is stated in the writ petition that M/s. Iraqi Airways is a State organisation under the Government of Iraq and was set up in Iraqi Airways Services Law No. 7 of 1961 and this law was slightly modified by Law No. (7) of 1976. It was pointed out that earlier Iraqi Airways was owned by the Railway Department of Iraq but later on it was placed under the Ministry of Communications. It appears from the writ petition that there was an air services agreement on 27th July, 1955 between the Government of Iraq and the Government of India under which the Government of Iraq had the right to operate services to fly in India, Iraqi Airways was to carry out this agreement so far as Iraq was concerned. Before the assessing officer it was stated that the income of M/s. Iraqi Airways belonged to a Sovereign State and, therefore, could not be taxed in India in view of the provisions of International Law. For supporting its case reliance was placed on a certificate issued by the Ambassador of Republic of Iraq in India, which confirmed that Iraqi Airways was a Department of Government of Iraq under the Ministry of Communications. Later on certificate from the Ministry of Communications of the Government of Iraq was also filed stating that M/s. Iraqi Airways was a Department of Government of Iraq. According to the Income-tax Department, M/s. Iraqi Airways were in the nature a statutory corporation and could not be considered as a Department of Government of Iraq. The assessee drew the attention of the assessing Officer to Article IX of Law No. 7 of 1961. It provides that after augmenting the paid up capital and after subscribing to the reserve fund the net profit of M/s. Iraqi Airways was to be wholly paid to the Treasury of the Republic of Iraq. This was not paid as a dividend but as a direct payment. In view of this stand, the assessee filed NIL returns showing the status as Sovereign State. The Income-tax Officer did not accept the claim of the assessee for exemption from Indian Income-tax Act and he treated the assessee as an Association of Persons and proceeded to determine the income under Rule 10. Before the CIT (Appeals) also it was pointed out that the assessee was not registered as a company under Company Law of Iraq and the income was not assessable to tax in Iraq as it was an establishment of Government of Iraq. The claim of the assessee on the basis of sovereignty was not accepted in appeal as well. He, however, reduced the income by reducing the rate of profit. In the writ petition the assessee had submitted that sovereign State is immune from municipal laws of another country and a foreign state was not liable to tax in another country. An effort was made to distinguish the assessee from corporations like State Trading Corporation or any other Government undertaking in this country. Attention was drawn to the various articles of the laws under which M/s. Iraqi Airways had to function. It was submitted that the Board of Administration had to submit to the Minister of Communications the project and estimates and the final accounts were also to be submitted to the Ministry. The Iraqi Airways could possess Government property free of charge and with the approval of Council of Ministers.
4. The emphasis was laid on the certificates issued by the Ambassador of Iraq and Ministry of Communications, Iraq which according to the assessee, leaves no doubt that it was a Depart-ment of the Republic of Iraq. It was pointed out that the issue had to be decided on the basis of the laws of Iraq and not any other law. Various cases were cited to prove the immunity of the sovereign State. It was also submitted that the immunity under the International Law had never been waived and it had, therefore, to be treated as a part of Iraqi Government. Attention was drawn to the Law of 1961 as well as 1976 to show that it was not a statutory corporation. According to the submissions made in the petition the real test to be applied for deciding such questions was whether the corporation is itself the owner of the profits or whether the profit of the corporation belonged to the Government itself. It was pointed out that M/s. Iraqi Airways was not separate from the Iraqi Government and it was, therefore, claimed that its income was immune from municipal laws of other countries irrespective of its activities.
It was submitted that even if a State carries on a commercial activity its income will still be exempt under the International Law.
5. The assessing officer rejected the contention of the assessee that the income of Iraqi Airways was not chargeable to tax in India on the ground that it was the income of a sovereign State. For this he relied on the assessment order passed for the year 1976-77 where certain reasons had been given for not accepting the claim of the assessee.
That order had travelled up to the Tribunal and the Tribunal had set aside that order with a direction that fresh assessment should be made after making proper inquiries and ascertainment of full facts. The CIT (Appeals) has also not gone in detail on this matter but the plea of the assessee was rejected. As extensive arguments were addressed before us on this issue, we propose to consider this matter at some length on the basis of the materials before us.
6. We have before us an affidavit filed by the Ministry of Transport and Communications of the Republic of Iraq stating that Iraqi Airways is a Government organisation under Law No. 7 of 1961 and its capital is owned by the State and the same position continues under Law No. 7 of 1976 and the law No. 116 of 1979. In support of this statement in the affidavit the copies of various laws have been filed before us. As already stated, the basic law was Law No. 7 of 1961, under which Iraqi Airways was to be an administrative establishment to operate on a commercial basis for the carriage of passengers and goods by air to other parts of the world. It was to be administered by a Board of Administration wholly manned by the Director General of Civil Aviation and the representatives from the Ministry of Finance and Communications. The Board was to act independently in its administrative and financial matters but where there were financial implications about a parti-cular level the approval of the Council of Ministers was to be obtained. The accounts of the Iraqi Airways were subject to the supervision of the Comptroller and Auditor General of Iraq. The annual net profit of the service was to be appropriated to augment the paid up capital until the whole approved capital became paid up. After that there was a provision for a reserve fund and the balance of the income was to be wholly paid to the Iraqi Government Treasuries. The Iraqi Airways was to acquire lands and building's necessary for its purposes in accordance with the propriation law and possess them free of charge if they were Government properties with the approval of Council of Ministers. The Minister of Communications was charged with the execution of this law. Another law was promulgated in 1976 and it also contained similar provisions. It was laid down in that law that the text contradicting the provisions of that law shall be repealed. In the regulations of 1977 the Ministry of Communications laid down details about the various organs of that Ministry. Article 12 of that regulation (page 42 of the Paper Book) gives the State organisation for the Iraqi Civil Aviation. The second part of this article mentions that the state enterprise for the Iraqi Airways shall undertake the operations of the air transportation of passengers, goods and post within and outside the country.
7. On the basis of these laws the affidavit had been signed by the Ministry of Transport and Communications and it has been attested by the Ministry of Justice and Ministry of External Affairs of the Republic of Iraq. There is a separate certificate also given by the Minister of Communications stating that Iraqi Airways is the Department of Government of Republic of Iraq. To the same effect is the certificate of the First Secretary to the Embassy of Iraq in Delhi. It is on these facts that we have to determine whe-ther the income earned by Iraqi Airways is the income of Iraqi Government and whether such income would be immune from taxation under the Indian Income-tax Act.
Whereas the basic stand of the Department is that Iraqi Airways is an independent under-taking of the Government of Iraq and it should be treated as a Statutory corporation, the plea of the assessee has been that it is a part of the Government machinery and not separate from it in any manner. According to them, it is not a statutory corporation or a company registered under the Iraqi laws. The main submission is that the income earned by Iraqi Airways was ultimately to go to the Government's treasury though the Government had decided that the income would first be used towards the building of a capital and reserves for running the Iraqi Airways. According to the counsel for the assessee, the independence given to the Board of Directors within the framework of law did not mean that it was a statutory corporation. Some sort of organisation was made to run the Iraqi Airways. But the test for holding it to be a part of the Government was that its income was to be the income of the State of Iraq and the budget was to be under the full control of the Government of Iraq. According to the learned counsel for the assessee, the position of Iraqi Airways had to be decided in accordance with law prevailing in Iraq and as it was a Department of the Government of Iraq. It had to be treated as such for the purposes of taxation in other countries. He pointed out that a parallel for such organisation can be the railways under the Government of India, which is administered by the Railway Board, which has lot of independence in its functions but at the same time was under the control of the Government and the Minister for Railways. It was contended that in case it was an independent corporation or a separate company the income could be given to the Government only after declaration of dividend and it would not automatically go to the Government or its Treasury. Under the law the income was first to be used for the purposes of the Iraqi Airways and then it was to be handed over to the Government treasury.
This, according to the learned counsel for the assessee, was a clear indication to show that Iraqi Airways was not a statutory corporation or a separate company but a Department of the Government itself. It could not be equated with a corporation like State Trading Corporation or a Government company like Bharat Heavy Electricals Ltd. 8. It was vehemently argued by the learned counsel for the assessee that there were some other airlines run departmentally by foreign Governments which were not subjected to tax in India and he gave the example of Aeroflot of U.S.S.R. It was submitted by him that the affidavits given by the Government of Iraq, their Ministries and Ambassadors could not be brushed lightly and the claim made therein cannot be ignored without bringing on record any similar material which may rebut the statement made in the affidavit or the certificates. The learned counsel made a statement at the bar that Iraqi Airways was not taxed in Iraq itself and in support of it he made reference to the statement made by the Iraqi authorities and also telex message received from Baghdad to to that effect.
9. The learned counsel proceeded to argue that under the accepted principles of International Law the income of its sovereign State cannot be taxed in another State unless there is a specific law provided for such taxation. In this connection, he made a reference to the decision of the Federal Court of Pakistan in the case of Punjab Province v. Federation of Pakistan [1957] 32 ITR 198. In that case the question arose whether the Central Government of Pakistan could impose income-tax on the income of the Punjab Province which was owning a factory outside that province. It was held that to attract the operation of Section 155 of the Government of India Act, 1935 there should be a specific legislation making the Government of a province expressly liable to income-tax in respect of its trade activities. As there was no such specific law it was held that the Province of Punjab was not liable to income-tax in respect of the profits earned by it or the factory. It was submitted that in the present case there being no specific law to assess the income from the foreign Government, the assessments had not been legally made.
10. Making a submission regarding the immunity from taxation, the learned counsel relied on the decision in the case of Krajina v. Tass Agency [1949] 2 All. ER 274. Tass Agency, Moscow, U.S.S.R. is the central information organ attached to the Soviet of People's Republic of U.S.S.R. A question arose whether Tass Agency was entitled to sovereign immunity in English courts. In that case also the Soviet Ambassador had given a certificate that Tass Agency was a Department of the Soviet State. It was held that having regard to the certificate, the burden of disproving that the Agency constituted such a Department was on the plaintiff. It was further decided that the question must be decided by Russian Laws and although the Soviet statute provided that the Tass Agency should enjoy all the rights of a juridical person and the Soviet Ambassador had certified that the Agency had the rights of a legal entity, there was no evidence before the Court to show that as to what was the essential requisites of a separate juridical existence under Soviet law. It was further held that even if the Agency was a State Department having a separate entity they did not follow that the Soviet Government by procuring its incorporation had deprived it of the right to assert the immunity normally attaching to a Department of a foreign State under International Law. Relying on the above decision it was argued that the Revenue had not brought any material to show that the Iraqi Airways was not a Department of the Government of Iraq.
Further reference was made to the decision of the Delhi High Court in the case of Deepak Wadhva 24 (1983) Delhi Law Times (sic) where it was held that Aeroflot (Soviet Airlines) is a Government organisation of U.S.S.R. and in view of this the provisions of Section 86 of the Civil Procedure Code apply to it. Under that section a foreign Govern-ment can be sued only after obtaining the permission of the Government of India and any decree obtained against it without obtaining the consent of the Central Government should be a nullity and not executable. In the above case it was observed by the Delhi High Court that the transformed principles of International Law after the enactment of the Code have no application in India unless the legislature amends the statutory provision. A reference was also made to the decision of the Court of Appeal in the case of Baccus (S.R.L.) v. Servicio National Del Trigo [1956] 3 All. ER 715. In this case immunity was claimed in respect of their defendant on the basis of the statement of the Spanish Ambassador and it was held that it was entitled to sovereign immunity from suit and such immunity had not been waived. The learned Counsel also relied on the observations and the commentary in the Halsbury's Law of England (Fourth Edition), page 797 where it has been stated that the immunity of a foreign Government is not limited to actions arising out of official governmental transactions but covers also actions arising out of the trading activities.
11. The learned Departmental Representative, on the other hand, sumitted that it was not within the jurisdiction of the Tribunal to go into the question of immunity of sovereign under International Law. The question has to be discussed and decided under the provisions of the Income-tax Act and no other law should be taken into consideration for deciding the question of taxability. Apart from this argument, the learned Departmental Representative referred to Law No. 7 of 1961 and pointed out that Iraqi Airways had been organised in a manner in which a public undertaking is organised and it was a corporation formed by a statute. Therefore, it could not be treated differently from a statutory corporation in India. It was pointed out that Iraqi Airways had its own juristic personality with rights to own and dispose of immovable property etc. Reliance was placed on the arguments advanced by the CIT (Appeals) while deciding the assessee's case for the assessment year 1976-77. Specific reference was made to Article 12 of the Law of 1961 which provided that the service shall be exempted from taxes and duties for a period of three years commencing from 1st April, 1961. On this basis it was submitted that but for this provision the income of the Airlines would have been taxable in Iraq and thus basically it was to be taxed in India as well. He contended that Iraqi Airways had its own legal personality and financial and administrative independence and was running on commercial lines and earning profits in foreign countries. Such an organisation could not be considered as a part of the Government of Iraq but merely a commercial corporation which might be under the control of the Government of Iraq but has to be treated separately for all tax purposes. He pointed out that Air India was also a Government organisation controlled by the Government of India but was chargeable to tax in India as well as outside India.
12. The Departmental Representative relied on the decision of the Supreme Court in the case of Andhra Pradesh State Road Transport Corpn.
v. ITO [1964] 52 ITR 524 where it has been claimed that the income derived by the Corporation was income of Andhra Pradesh State under Article 289 of the Constitution. Considering this plea the Supreme Court held that the Road Transport Corporation has a personality of its own distinct from that of the State or other shareholders. The income derived by such corporation from its trading activity cannot be claimed by the State and it was, therefore, not exempted from income-tax. He also submitted tha,t in the case of Andhra Pradesh State Road Transport Corporation the profit was to go for the development of the roads and the State and yet it was held that the income was taxable in the hands of the Corporation. He contended that the commercial activity cannot be considered as a sovereign Government's activity and should not be given any immunity. He further referred to the decision of the Supreme Court in the case of CIT v. H.E.H. Mir Osman Ali Bahadur [1966] 59 ITR 666 particularly the observa-tions at 672. In this case the Supreme Court did not hold that a foreign sovereign is immune from taxation but only assumed it for the sake of disposal of that case and held that Nizam was not a foreign sovereign who had acquired any other personality and, therefore, he was not immuned from taxation. At page 672 the observations from an American journal of International Law states that the immunity from Taxation should be the rule when the activities concerned are those normally and traditionally regarded as governmental in character; but when a foreign State engages in trading operations of a type generally open to private persons, there seems no need to better its competitive position or to shift tax burdens to others through giving it exemption from taxes.
13. Referring to the certificates and affidavits filed on behalf of the assessee, it was contended by the Departmental Representative that they were not conclusive and binding for deciding the issue before the Tribunal. They were self-serving certificates and, there-fore, they should not be accepted and acted upon. He submitted that the law itself was rebuttal of the claims made in the certi-ficates as it clearly indicated that Iraqi Airways had any indepen-dent personality and separate in existence. Referring to the decision of the Delhi High Court in the case of Aeroflot (supra) it was submitted that Section 96 of the C.P.C. clearly provided for taking away the immunity by stating that a suit could be filed if certain conditions were fulfilled.
Referring to the other case laws it was submitted that the case laws of England could not be applied to Indian conditions and the only guide for deciding the issues should be the provisions of the Income-tax Act or the provisions of Indian Constitution. It was, therefore, contended that the Iraqi Airways was not a department of the Government of Iraq but it was a commercial undertaking acting independently and earning income in various countries. Such an organisation was liable to tax as in other commercial organisation or corporation or company.
14. The rival submissions lead to two issues on this aspect of the matter. Firstly, we have to determine whether the income of a sovereign State is immune from taxation in any other country and in spite of the fact that there is no such provision in the Income-tax Act for such exemption the income cannot be brought to tax. Secondly, the question arises whether in this case Iraqi Airways has been shown to be a department of the Government of Iraq and the income arising to it in India is the income of the Iraqi Government, thus eligible for immunity from taxation under International Law. Before we proceed to consider these aspects, we must dispose of a preliminary objection raised by the Departmental Representative. We have no doubt in our mind that when the question of taxation has come up in appeal before us and the contention of the assessee that it was not liable to tax on the basis of sovereign immunity has been rejected by the authorities below it was well within the jurisdiction of this Tribunal to go into these issues and decide the matter in accordance with law.
15. We may note the commentary and observations of various experts of International Law on the question of sovereign immunity. Hall's International Law, 8th Edition at page 220 carries the following observation :- A sovereign, while within foreign territory, possesses immunity from all local jurisdiction in so far and for so long as he is there in his capacity of a sovereign. He cannot be proceeded against either in ordinary or extraordinary civil or criminal tribunals, he is exempted from payment of all dues and taxes, he is not subject to police or other administrative regulations, his house cannot be entered into by the authorities of the State and the members of his suite enjoy the same personal immunity as himself.
Another expert Oppenheim in his book on International Law, Volume I, Fifth Edition at page 590, observes :- He (meaning a sovereign) must be granted so called exterritoriality conformably with the principle, per in parem non habet imperium, according to which one sovereign cannot have any power over another sovereign. He must, therefore, in every point be exempt from taxation, rating and every fiscal regulation and likewise, from civil jurisdiction, except when he himself is the plaintiff.
Holland in his Lectures on International Law, at page 201, observed as under :- An Ambassador is exempt from taxation and also from customs dues ; by right as to property held in his representative capacity and by courtesy as to property held otherwise. An ambassador is given rights given to his sovereign and it is because the sovereign is exempt from taxation that such exemption is given to the ambassador.
In the case of Parlement Beige [1980] 5 P.D. 197, it was held as under : As a consequence of the absolute independence of every sovereign authority and of the international comity which induces every sovereign state to respect the independence for every other sovereign state, each state declines to exercise by means of any of its Courts, any of its territorial jurisdiction over the person of any sovereign or ambassador, or over the public property of any state which is destined to its public use, or over the property of any ambassador, though such sovereign, ambassador, or property be within its territory.
Justice Harries of Calcutta High Court while deciding the case of Maharaja Bikram Kishore of Tripura v. Province of Assam [1949] 17 ITR 220 observed that it appeared to him that a sovereign State was not liable to tax in another State. Quoting from the Halls-bury's 3rd Edition it has been commented in Sampath Iyengar's Law of Income Tax, 7th Edition, First Vol. at page 14 that sovereign immunity exists to a Department of a Sovereign State even though the Department has an independent juristic personality and has the rights of the legal entity according to the law of foreign state. The following observations in the commentary may be reproduced as relevant :- This principle is of great practical importance nowadays when nationalisation is in the air. If the government of a country in order to carry into effect its scheme of nationalisation of a particular industry, say, coal-mining or generation or distribution of electricity, incorporates a body which is responsible to the minister and through him to Parliament of the country, all its profits going to the public treasury, it would virtually be a department of the state.
It has further been observed in the above commentary that whether a particular Ministry or Department is to be a corporate body or an incorporated body is purely a matter of governmental machinery and there is no incompability of a separate legal juristic corporation being simultaneously a department of the State. Referring to the decision in the case of Baccus (S.R.L.) (supra) referred to above, the commentary further observes that the circumstance that the sovereign effectuate its nationalisation scheme through the medium of a corporate body does not mean that the sovereign government have deprived that particular corporation of the immunity, which normally attaches to a Department of a sovereign State. It is also clarified that the general sovereign immunity yet remains in India a matter of convention.
16. In view of the above legal position the plea of the assessee that the income of a sovereign State is immune from taxation in another State, has to be accepted. This could be overcome only by a specific clear legislation to the contrary. Now on the basis of the law under which Iraqi Airways was formed and the manner in which it was organised and administered it is a part of the Iraqi Government and a department of its Ministries. The main test to decide whether the income earned by Iraqi Airways belongs to the Iraqi Government or any other corporation is clinched by the provision under which the income earned by the corporation can be accumulated towards their own capital and reserve and after that it has to be directly paid into the Government treasury.
The administration of the Iraqi Airways does not have any discretion not to pay the balance of income in the government treasury and it does not depend on the declaration of a dividend by the Iraqi Airways. In deciding such matters we cannot be guided fully by the law of incorporation, which is there in India. We have to be guided by the law of the land where Iraqi Airways came into existence. The interpretation of that law as made by the authorities of that country cannot be treated lightly. Various authorities from Iraq and their ambassadors in India have clearly certified that Iraqi Airways is a Department of the Government of Iraq and is not an organisation independent of the Government. It is only for some administrative purposes that some sort of freedom has been allowed to the Board of Directors which is constituted by the officials of the Government or the nominees of the Government. In such a situation we see no reason not to accept the statements made in the certificate and the affidavits.
17. While on this issue we are constrained to observe that sucli a matter should have been sorted out at the level of the Government of the two countries and it should not have been left to the officers of the Department to determine the issue of sovereign immunity. At least nothing has been brought to our notice to show that there had been any serious or sincere effort to sort out this issue with the Iraqi authorities. It is true that the officers of the revenue Department have to act in accordance with the Income-tax Act and have to bring to tax whatever is taxable under that law. However, where a question arises like this, where the other party claims to be the Government of a sovereign State with whom India has friendly relationship, it does not look proper to reject the certificates and the affidavits of the authorities of that country without there being any similar material to hold the contrary view. It does appear that the Department had taken some legal advice but that should not have been considered enough in tackling this matter which involved another country.
18. On the consideration of the legal position and the arguments of both the sides, we hold that on the basis of materials on record Iraqi Airways is a Department of the Government of Iraq and the income earned by it is the income of the sovereign State of Iraq. We further hold that as the income of a sovereign state is immune from taxation, the plea of Iraqi Airways should have been accepted. We thus hold that the assessment of income of Iraqi Airways was illegal and we hold accordingly.
19. In view of our above decision, the other aspect of the matter would become academic. However, as arguments have been addressed on other aspects as well, we proceed to decide those issues also. We first consider the objection raised on behalf of the assesses that the proceedings of assessment were vitiated as the notices Under Section 139(2) or 148 had not been legally served on the person on whom they should have been served in accordance with law.
20. The learned counsel for the assessee had made three blocks of these appeals, one pertaining to assessment years 1970-71 to 1973-74 and the other 1974-75 to 1979-80 and third for 1980-81 and 1981-82. It was also mentioned that income of these cases, the proceedings were initiated Under Section 148 while in others it was Under Section 139(2).
21. We have already adjudicated the first issue in dispute in favour of the assessee that the assessee is a department of a Foreign Sovereign State and as such enjoys immunity from Indian Income-tax. We are also accepting the assessee's other contention in respect of applicability of Rule 10(ii) subject to observation that assessee's claim for depreciation to be allowed. In view of these two finding's, the issues pertaining to validity of notices initiating the proceeding or their service became academic because once the assessee has been accepted to be Sovereign and as such to be enjoying immunity from Indian Income-tax, alleged invalidity of the notice or of their service is not going to be of any consequence to either party. More so, when we are also adjudicating that total income be computed as per Rule 10(ii) and depreciation be allowed because the learned Counsel for the assessee in course of arguments submitted that had the income been computed as per Rule 10(ii) and depreciation allowed probably the assessee would have never seen the doors of any appellate authority, because on that basis it was impossible for the revenue to have computed any positive figure of income in any of these years. But since the issue pertaining to service was argued at length and the learned counsel of the assessee very much pressed for a finding on the same, we shall be failing in our duty in case we leave the same undecided calling it academic though it has become so in face of our two findings in favour of the assessee.
22. The learned Counsel for the assessee submitted that M/s. Iraqi Airways has no permanent establishment in India. Only a Sales Manager or Sales Director of the same used to sit in the Office of the Travel Agents which was situated at N-4, Janpath, Connaught Circus, New Delhi.
He submitted that the notices Under Section 148 or 139(2) for some years have been served only on travel agent or its employees. At this very stage, he also submitted that Sales Manager of Iraqi Airwa.ys himself who derives his salary from Embassy of Iraq in India is not subjected to Indian Income-tax Act. He submitted in case it was an Association of Persons, the notice should have been served on a member of Association of Persons. He drew our attention to Section 282 of the Income-tax Act which requires that when status of Association of Persons has been assigned, the notice should have been served either on the principal officer or any member. He submitted that the mere fact that returns has been filed by Iraqi Airways through its manager, it cannot right the wrong service or invalid service which was never effected on the right or authorised person. He submitted that proper service alone is the foundation of valid jurisdiction. It is not enough that notice Under Section 148 somehow found its way to the proper assessee or that the proper assessee appeared and filed an objection to the proceedings. Unless the notice is served on the proper person in the manner prescribed Under Section 282 or Section 283 in case of dissolved firm etc. the service is insufficient and Income-tax Officer does not have the jurisdiction to reassess escaped income. In respect of his above aspect of the arguments, he relied on a catena of decisions which are CIT v. Baxiram Rodmal [1934] 2 ITR 438 (Nag.), CIT v. Dey Bros. [1935] 3 ITR 213 (Rangoon), C.N. Nataraj v. Fifth ITO [1965] 56 ITR 250 (Mys.), CIT v. Coimbatore Pictures (P.) Ltd. [1973] 90 ITE, 452 (Mad.), Lakshmibai v. ITO [1972] 86 ITR 804, 814 (Mys.) and S.K. Manekia v. CST 1978 Tax LR 1625 (Bom.), etc. Income-tax Officer in doing the very important work of assessing income-tax, must take the elementary precaution of seeing that the person with whom they are dealing is in fact authorised to represent the assessee and they are not entitled to assume this merely because such person has on occasions signed a notice, possibly under pressure or produced account books for inspection.
23. The learned Departmental Representative, on the other hand, relying on the orders of the two lower authorities, submitted that service has been effected on the authorised person. Moreover, according to him, all the notices were responded by filing of returns for the respective years and there was complete acquiescence by the assessee in the proceedings and hence there is no invalidity of the service. He submitted that in case Section 282 is carefully read its preamble shows that the overriding provision is Civil Procedure Code. Section 63 of the old Act and Section 282 of the new Act are alike, he submitted. He went through the commentary of Civil Procedure Code in order to substantiate as to who is an authorised person. He also went through commentary of Mulla on C.P.C. He submitted that returns are served on the very same person who has authorised the lawyer Shri Jodh Singh to represent the assessee in all Income-tax proceedings. According to him, as per Section 282-C notices are only to be addressed whereas it is as per C.P.C. that they are to be served. He summarised that notices are properly issued and addressed and are served on authorised person and there is no infirmity or illegality brought out by the assessee. He advanced a separate argument for the assessment years 1980-81 and 1981-82 and he submitted that notices Under Section 139(2) had been properly served. Even otherwise the returns were validly filed by the assessee and they could be treated as returns Under Section 139(4). In the alternative, he submitted that assessee's acquiescence is enough to which the learned counsel for the assessee immediately replied that acquiescence against law cannot grant validity to the notices. The Departmental Representative relied on CIT v. Bhanji Kanji's Shop [1968] 68 ITR 416 (Guj.), Dr. H.R. Rat v. CIT [1984] 145 ITR 809 (MP), Mahendra Kumar Agrawalla v. ITO [1976] 103 ITR 688 (Pat.) and CWT v.Mrs. Illa Pal Choudhury [1971] 82 ITR 936 (Cal.). Then he met almost all the cases cited by the learned counsel for the assessee and submitted that either reliance of the learned counsel on those cases is misplaced or the same are distinguishable. He said that in the case Bhagwan Devi Saraogi v. ITO [1979] 118 ITR 906 (Cal.), mistake was that of status. In Thangam Textiles v. First ITO [1973] 90 ITR 412 (Mad.) the notice was served on ex-partner. In C.N. Nataraj's case (supra) the notice was served in the name of a minor. He submitted as per 13 STC 517 (sic) when a service is accepted by the assessee, it is good service. In the end, he submitted that this objection was neither raised before the Income-tax Officer nor before the CIT (Appeals).
Ultimately, he said as per Section 292-B, this is only a rectifiable defect. He pleaded that the assessment has been properly made.
24. In the rejoinder, the learned counsel for the assessee submitted that it is wrong to say that objection was not raised before the learned lower authorities. He read out para. 4 of each assessment order for all the years wherein objection regarding service is projected.
According to him, as per Section 282, requirements of issuance of a notice are that it should be on a member of Association of Persons or partner or principal officer of the association. There is nothing like authorised person. 'Principal officer' according to him, is defined in Section 2(35). The gentleman on whom the service was effected was not the 'principal officer'.
25. After taking into consideration, the rival submission and going through the facts at length and considering the case laws cited by both the parties, we are unable to accept the contention of the assessee that service was not validly effected and, therefore, the assessments be annulled. First of all, we may briefly state that Iraqi Airways as per admission of the learned counsel of the assessee himself is represented in India by its Sales Manager or Sales Director who is not subjected to Indian Income-tax and who is paid the salary by Embassy of Iraq. It is also submitted by the learned counsel of the assessee that Iraqi Airways does not have any permanent address in India but the sales director or manager who represented the Iraqi Airways sits in the office of Travel Agent which is located at N-4, Janpath, New Delhi.
26. We have held that Iraqi Airways is a Sovereign, which enjoys the immunity of tax. Most of the arguments advanced by the learned counsel of the assessee on the premises that the assessee was taken as the Association of Persons have lost their weight and on most of the case law reliance of the learned counsel of the assessee in this regard is misplaced. First of all, we place below Section 282 which deals with service of notice generally : 282. (1) A notice or requisition under this Act may be served on the person therein named either by post or as if it were a summons issued by a court under the Code of Civil Procedure, 1908 (5 of 1908).
(a) in the case of a firm or a Hindu undivided family, to any member of the firm or to the manager or any adult member of the family ; (b) in the case of a local authority or company, to the principal officer thereof ; (c) in the case of any other association or body of individuals, to the principal officer or any member thereof ; (d) in the case of any other person (not being an individual), to the person who manages or controls his affairs.
27. The learned counsel of the assessee relied on Section 282(2)(c) but actually in this case after we have accepted the contention of the assessee's counsel that assessee is sovereign and not an 'association of persons', as understood in the Income-tax Act, it would be Section 282(2)(d) which would be applicable and in that case notice has to be addressed to the person who manages or controls the affairs. In the instant case, there is no dispute about the fact that sales manager or director of Iraqi Airways represents sovereign assessee in India as admitted by the assessee's counsel himself that he has been paid the salary from the Embassy of Iraq and is not subjected to tax. In order to clarify the position for all the years indicating section under which notices were served and dates when returns were filed and person on whom the notices were served in person who Bigned the return is indicated below in a chart furnished to us by the learned Senior Departmental Representative on our asking after we had perused the assessment record for all the years. The same reads as under :-------------------------------------------------------------------A.Ys.
Notice Return filed Remarks ---------------------- --------------- (Notices signed by) U/Section/ Served Served on by------------------------------------------------------------------- 1 2 3 4 5 6 7-------------------------------------------------------------------1970-71 148/ 26-3-79 See 8-12-80 Tarak-UL- Two persons signed Remarks RASH/D.the receipt on the1971-72 148/ 12-3-80 6-12-80 -do- Receipt on the no- 10-3-80 tice is signed by the same person1972-73 148/ 12-3-80 6-12-80 -do- -do- 10-3-801973-74 148/ 12-3-80 6-12-80 -do- -do-1974-75 148/ 8-11-78 6-12-80 -do- Two persons singned the receipt on the1975-76 148/ 8-11-78 6-12-80 -do- Two persons singned the receipt on the1976-77 139/ 18-10-78 28-2-79 Same person who si- 8-11-78 gned the Power of Attorney.1977-78 148/ 8-11-78 21-1-80 M.T. At Two persons singed Yassin receipt on the not-1978-79 139/ 8-11-78 21-1-80 MT At -do- Yassin1979-80 - - 21-1-80 MT At Appears to be volun- Yassin tory return. Kindly1980-81 139(2) 5-2-82 16-1-81 Moayed 139(2)served on the 29-11-80 Yassin AI persons as in earlier NASIRI years.1981-82 139(2) 5-2-80 14-12-80 Jihad Ab- -do- dul Sahib 28. Prom the above chart, it is apparent that all the returns are filed by Sales Manager or Director of Iraqi Airways in India and most of the notices bear more than one signature which sometimes include the Manager and sometimes the employee of Travel Agent because it is in the said office of the Travel Agent where the manager or principal officer of Iraqi Airways sits. It will not be out of place to mention that it is all through the sales manager or sales director has signed the returns and it was he who signed the power of attorney in favour of Shri Jodh Singh, Advocate. Then we perused certain papers filed by the assessee before the High Court in form of writ petition and orders of the High Court and we find that on page 18, the petitioner is described as under : IRAQI AIRWAYS, being a Division of the State Organisation for Iraqi Civil Aviation under the Ministry of Communication, of the Republic of Iraq, through its Manager, India, having its office at N-4, Janpath, Connaught Circus, New Delhi.
Then in another matter regarding assessment and recovery proceedings against Iraqi Airways, it is given by Moayed Y. Al-Nasiri, aged about 37 years son of Moyed-Yassin Hilal-Al Nasiri, residing at A-ll/8, Vasant Vihar, New Delhi and the very first paragraph reads, "I am the Manager (India) of the petitioner and am as such competent to dispose by way of this affidavit. Then in other civil petition before the High Court, the petitioner has indicated as below : IRAQI AIRWAYS, being a Division of the State Organisation for Iraqi Civil Aviation under the Ministry of Communication of the Republic of Iraq, through its Manager, India, having its office at N-4, Janpath, Connaught Circus, New Delhi.
29. From all these facts, it is clear that the Iraqi Airways has been subjected to income-tax, by revenue authorities though it is a Sovereign which has been held to be immune from taxes by us as above.
For all purposes, it is the manager of the said concern who has been filing petition before the High Court, appointing lawyer on behalf of Iraqi Airways and giving affidavits on behalf of the Iraqi Government and he can be treated as the authorised person. It is he alone who has filed all the returns for all the years as detailed above, the service of notices in the office of Iraqi Airways sometimes on him and sometimes jointly on him and the employees of the Travel Agent are valid. All notices are addressed to Iraqi Airways and there is nothing wrong in the same. The very fact that the sales manager and Director has signed the return once it should not lie in the mouth of the assessee to say that he was not an authorised person, We also find force in the submission made by the learned Departmental Representative regarding the assessment years 1980-81 and 1981-82 that in any case the returns filed were to be treated as returns Under Section 139(4) and so the assessments made were valid. The contention of the learned Departmental Representative regarding the effect of Section 292-B becomes academic.
30. Coming to the law cited by the learned counsel for the assessee at bar, we find how in the case of Baxiram Rodmal (supra), the dictum given by Their Lordships was : Income-tax Officers, in doing the very important work of assessing income-tax, must take the elementary precaution of seeing that the person with whom they are dealing is in fact authorised to represent the assessee and they are not entitled to assume this merely because such person has on occasions signed a notice, possibly under the pressure or produced account books for inspection.
31. In the instant case, it is not served and service although has been effected on some employee of Iraqi Airways or employee of its agent. In case of Dey Bros. (supra) what was held was, that the mere fact that the notice had in some way or other reached the person upon whom it was to be served was not sufficient but there must be service as prescribed in Section 63(1) of the Income-tax Act. Section 63(1) was just like Section 282(1) of the present Act and as above said the service was made either on the sales manager or the employee of the sales agent in response to which the returns were filed. Thus this case 3 ITR is not applicable to the facts here.
32. Coming to Mysore High Court decision in case of C.N. Nataraj (supra) what was held was that where notices are found to be the basis of proceeding Under Section 147 of the Act and were held wholly invalid, the assessee could not be assessed in pursuance of such notices. In the instant case, notices were issued in the name of Iraqi Airways and the same were served on the employees of Iraqi Airways or its sales agent (in the same office) in response to which the returns were filed by Iraqi Airways through its sales manager, or Director. We do not find anything wrong with the said notices. Madras High Court decision in the case of Thangam Textiles (supra) also lays down the same proposition but in that case, the notices were served on erstwhile partner who had retired long ago and was not a partner immediately before the dissolution of the firm, the reassessment proceedings were held invalid. In the instant case, notices were served on a Government Department of Iraq, through legally appointed sales manager or director. Coming to Mysore High Court decision in the case of Lakshmibai (supra) the reassessment was to be made was in case of HUP and notice was served on the mother of the karta. On these facts, Their Lordships held that notice should be issued to the family and it can be served on the manager or any other adult member of the family but the notice has to be addressed to the family. Therefore, the notice was considered invalid. In the instant case, the notice was addressed to the Iraqi Airways and was served either on its employee or employees of the sales agent who sit in the same office. On another decision of Mysore High Court in case of C.T. Rajagopal v. State of Mysore [1972] 86 ITR 814. The reliance of the learned Counsel for the assessee is misplaced because in that case there was no notice served on the assessee requiring him to submit the returns and, therefore, proceedings were held to be illegal. It is not so in the instant case.
Again, reliance is placed on the case of S.K. Manekia (supra). The reliance on this case is also misplaced because it was the sales director or manager or employee of the same agent who was served with notice. Reliance of learned counsel for the assessee on other case viz.
Y. Narayana Chetty v. ITO [1959] 35 ITR 388 (SC) is misplaced due to distinction of facts. There is no dispute about the fact that reassessment cannot be sustained unless there is a valid notice and valid service but it was not so in the instant case. The Calcutta High Court in case CIT v. Kiran Debi Singhee [1967] 65 ITR 501, also does not come to the rescue of the assessee. The Calcutta High Court decision in Bhagwan Devi Saraogi's case (supra) could be of some assistance to the assessee had the status of the assessee been confirmed by us as Association of Persons since we have treated the same to be sovereign, this case also could not be fatal to the claim of the revenue.
33. On the question of acquiescence, the Gujarat High Court decision in the case of Bhanji Kanji's Shop (supra) cited by the revenue supports the view that even if notice is served on temporary employee and the same is received by the assessee, the proceedings were treated as properly instituted. In the instant case, the revenue's claim was based on stronger footing. The Patna High Court in the case of Mahendra Kumar Agarwalla (supra) also held that notices were not served on authorised person but the assessee had acted on the same. Proceedings were held to be not invalid. In the instant case, the notices were served on the authorised person and it was the Iraqi Government Officer holding the job of sales director or manager who filed the return. The Calcutta High Court decision reported in Mrs. Illa Pal Choudhury's case (supra) also fortifies our view that when the returns were filed by proper person, the service of notice even on employee of Traval Agent who were closely allied with the business of the assessee could not be damaging to the claim of the revenue. The Madhya Pradesh High Court decision again in Dr. H.R. Rai's case (supra) speaks of irregularity which is capable of being modified or corrected. In the instant case, the service was on the officer of Iraqi Government or on the employee of the sale agent who were working in the same office and the returns were filed by the same officer belonging to the Government of Iraq who is paid by Embassy of Iraq and it is the same gentleman who filed the affidavit petition in the High Court on behalf of Iraq Government and appointed lawyer before the Income-tax Authorities for their proceedings. On this ground the proceedings could not be invalidated.
In the result, this issue is adjudicated against the assessee.
34. One of the common grounds in all the years relates to the computation of income of Iraqi Airways. The Inspecting Assistant Commissioner (Assessment) while making the assessment referred to the claims of the assessee and observed that the income was to be computed under Rule 10(ii) of the Income-tax Rules, 1962 as per audited statement of the world income including India and accounts and books maintained in India. The assessing Officer worked out the percentage of profit/loss in the world business and determined the loss in India after applying the same ratio to Indian receipts. The assessee had, however, claimed depreciation on aircraft, aircraft accessories and buildings. After referring to figures on which depreciation had been claimed the Inspecting Assistant Commissioner observed that the cost of the aircraft had not been satisfactorily explained and the prescribed particulars were also incomplete. In view of this, he held that the claim for depreciation could not be allowed. The Inspecting Assistant Commissioner further observed that it was not possible to verify from the particulars given, the correctness of the figure of written down value, the details of assets added, sold or discarded, demolished so as to work out the income correctly. He, therefore, determined the income/loss without adjustment of any depreciation whatsoever. In the first few years he found that even without allowing depreciation, there was loss. He, however, observed that this loss could not be carried forward, as the returns showing losses had been filed in response to notice Under Section 148 after lapse of two years from the end of the assessment year. In the same way, a revised loss return was held to be invalid and it was pointed out that the loss could not be carried forward. In view of this, he filed the proceedings Under Section 148 for those years where the total income had been determined at loss. For later years the Inspecting Assistant Commissioner observed that the assessee had not been able to prove the cost of the assets and though some time was given to him, he could not bring any evidence to prove the cost of assets on which depreciation had been claimed. No audit report had been filed in spite of specific requisition made.
35. When the matter came before the CIT (Appeals), the assessee had taken a ground before him about the claim for such allowance of depreciation as well as regarding the carrying forward of losses. The CIT (Appeals), however, was of the view that the action of the Inspecting Assistant Commissioner (Assessment) in computing the income proportionately on the basis of Indian receipts by applying Rule 10(ii) of the Income-tax Rules was erroneous. He observed that the appellant had not produced its books of account. The original trading and profit and loss account were prepared in Arabic and an English translation which has been placed before the Inspectng Assistant Commissioner (Assessment) could not be verified by the Inspecting Assistant Commissioner (Assessment). The Inspecting Assistant Commissioner could not verify the bills and vouchers for making any worthwhile investigations to compute the world income with reference to the Indian Income-tax Act. According to him, mere acceptance of the statement of accounts without making any inquiry and investigation was not proper.
According to the learned CIT (Appeals), the assessing officer could not have been satisfied regarding the correctness of the statement of accounts. According to him, it was impossible for an Indian Income-tax Officer without a proper knowledge of Arabic to scrutinise the books of account of the appellant verify and accept the statement of income placed before him. In view of this position, the CIT (Appeals) held that Rule 10(ii) should not have been applied for purpose of making assessment and the appropriate method for determining the income was Rule 10(i). At this stage we may reproduce Rule 10 which is as under :- 10. In any case in which the Income-tax Officer is of opinion that the actual amount of the income accruing or arising to any nonresident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment in income-tax may be calculated :- (i) at such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising bear to the total receipts of the business, or (iii) in such other manner as the Income-tax Officer may deem suitable.
36. While determining the income of the assessee under Rule 10(i) the CIT (Appeals) referred to Section 44B of the Income-tax Act wherein 7.5% of the Indian turnover could be taken as the net income of the foreign shipping company. He adopted the same basis for determining the income of the assessee for these years. As this was resulting in an enhancement the CIT (Appeals) gave notice for the same to the assessee.
The assessee had stated before the CIT (Appeals) that there was no difficulty in getting the appropriate translations of the accounts and there was no hurdle in making any inquiry or any investigation due to the difficulty of language. There was no basis for suspecting the accuracy of the audited statements. It was further pointed out that considering the losses incurred by the assessee the adoption of particular percentage of the turnover was not the proper method for this case. The CIT (Appeals), however, did not accept this plea of the assessee, as according to him, besides the language difficulty, it was not possible to effectively verify the books of account and the relevant vouchers, etc. The plea of the assessee was rejected by the CIT (Appeals) determining the income under Rule 10(i) by adopting the income at 7.5% of its Indian turnover. As the income was being determined under Rule 10(1) the CIT (Appeals) held that there was no question of adjudicating the question of depreciation as that had now become superfluous. The CIT (Appeals) also did not consider the question of carrying forward of losses as after this computation there would be no losses to be carried forward.
37. Before us it was contended by the learned counsel for the assessee that the CIT (Appeals) was not at all justified in changing the basis adopted by the assessing Officer to determine the income under Rule 10(ii). He submitted that the assessee had given world accounts with all the necessary details before the assessing Officer. The originals of the accounts may have been in Arabic but appropriate translations had been furnished and at no stage had the assessing Officer doubted the correctness or accuracy of these accounts. It was further contended that in the case of such business the assessments are made on the basis of accounts which are thoroughly audited and at no stage had the assessee declined to give any specific information to the assessing Officer. This matter had arisen only because while making the assessment the claim of the assessee for allowance of depreciation had not been allowed. He further pointed out that Rule 10(ii) could be left out of consideration in a case where the figures on the basis of the world accounts were not available or there was any other specific difficulty in making the world accounts as the basis for determining the income. The learned counsel for the assessee was agreed that in spite of considering the assessee's claim for allowance of depreciation the CIT (Appeals) has changed the basis for determining the income without any justification and has made enhancement where it was sot called for. He pointed out that in a case where Iraqi Airways had suffered losses in some years, the CIT (Appeals) had determined some notional figure of profits and thus the tax liability has been fastened to the assessee without any justification. It was further submitted that the determination of the percentage of profit at 7.5 % was without any basis. He pointed out that in the latest Finance Bill a percentage of 5 have been fixed for the purpose of determining the income of the Airlines but that too could not be applicable for the years under consideration. The Departmental Representative submitted that the CIT (Appeals) found that there was practical difficulty in allowing the claim for depreciation as the necessary particulars have not been furnished and the assets which were used in India were not clearly known. He submitted that the assessment by the assessing Officer was not a formality and it was not possible for the assessing Officer to go through the Statement of Accounts which were originally in Arabic.
Thus, there was justification for the CIT (Appeals) to change the method and to adopt one of the methods given in the Rule. As regards the rate of profit for income adopted the Departmental Representative submitted that the CIT (Appeals) has given some basis for the same as he referred to the basis provided for shipping company.
38. In reply the learned counsel for the assessee submitted that Rule 10 cannot be applied arbitrarily and it was not a substitute for Section 145 and its proviso. It was further submitted that the details for the claim of depreciation had been furnished and the Income-tax Officer had not pointed out any specific deficiency in such particulars. He pointed out that when the matters were pending the assessee had approached the Inspecting Assistant Commissioner and after considering the plea of the assessee for allowance of depreciation he had directed that the assessment should be made on the basis of audited accounts after necessary verification.
39. We have considered the arguments on the question of determination of income and we are of the view that the assessing Officer having applied Rule 10(ii) it was not correct for the CIT (Appeals) to direct the application of Rule 10(i) merely on account that the accounts were originally Arabic and the assessing Officer did not know that language.
The assessing Officer had never expressed his difficulty about the understanding of the accounts and had not called upon the assessee to explain any figures or to support it with further evidence. At no stage was any voucher or any other particular called for. Normally in such cases the assessments proceed on the basis of the audited accounts, the certificate of the auditors and statement of accounts duly verified by an authorised person. It is true that it is open to the assessing Officer to call upon the assessee to give details of any particular account or a particular item and to substantiate it with necessary evidence and material. However, as a general principle the objection of the CIT (Appeals) cannot be considered to be correct. It is common ground that in such a case the Rule itself is applicable. Generally where the overall profit and loss account of the total activity is available Rule 10(ii) should be applied. Only where such overall accounts are not available, the application of Rule 10(i) on the basis of local turnover should be justified. The discretion in the Rule is given to the Income-tax Officer and the exercise of that discretion has to be proper and in judicious manner as held by the Supreme Court in the case of CIT v. Simon Carves Ltd. [1976] 105 ITR 212. Circular No. 7 of 1942 where instructions were given regarding the assessment of shipping companies, the world accounts furnished by the shipping companies had to be the basis for making the determination of income.
There are also directions for acting on the certificates issued in United Kingdom in respect of British Shipping Companies. In case of Netherlands Steam Navigation Co. Ltd. v. CIT [1969] 74 ITR 72, it was held by the Supreme Court that normally the second method was applicable where the necessary data for that are available. This method ordains that the fraction which the total profits bear to the total world receipts is to be applied to the Indian receipts for determining the taxable profits, The income so determined will be the taxable income without any further allowance because the permissible allowances will all enter the computation of world income and income taxable under the Income-tax Act as also fraction thereof. It is true that in that case the second method had not been applied but the court observed that if it was applied in the computation of the world profits of the assessee it would have been necessary to allow the various depreciation allowances.
40. Having considered the facts of the present case and the legal position as laid down in. the various cases, we agree with the submission of the learned counsel for the assessee that the substitution of Rule 10(i) by Rule 10(ii) by the CIT (Appeals) was not made on any valid basis. The CIT (Appeals) should have and could have given directions for correcting any error which might have taken place in applying Rule 10(ii). The grievance of the assessee before the CIT (Appeals) was that while determining the world income or world loss depreciation had not been taken into consideration. This plea of the assessee should have been considered by him and he could have given directions for the same. We would, therefore, set aside the direction given by the CIT (Appeals) on the question of determination of the income and hold that the income of the assessee had to be determined under Rule 10(ii) of the Income-tax Rules. This special Rule requires that the total profits of the business have to be computed in accordance with the provisions of the Indian Income-tax Act it is not clear from the assessment orders whether the profits have been so determined under the provisions of the Act. This requires verification.
While doing so depreciation is bound to be taken into consideration. It would be open to the assessing Officer to get all the relevant and necessary details for the purpose of determining the depreciation and he can call for any specific details if he considers it necessary.
After determining the total profits of the business after allowance of appropriate depreciation the assessing Officer should determine the proportion which he has to apply to the Indian receipts of the assessee.
41. Another part of the ground relates to the claim of carry forward of loss. The CIT (Appeals) has not given any direction regarding this claim as he had determined profit on an ad hoo basis. We, however, find that even in respect of the loss determined by the Income-tax Officer without allowing depreciation he had held that it was not to be carried forward. In fact as the proceedings had been initiated Under Section 148, the assessing Officer had decided to file those proceedings as he found that no income had escaped assessment in those years. We do not find any fault with the order of the assessing Officer where he drops the assessment proceeding's Under Section 148 after having found that in fact there had been no escapement of income as a result of the non-filing of the return by the assessee. However, where a normal assessment is made it would be incumbent on the assessing Officer to determine the losses and carry them forward in accordance with law and he cannot deny it on the basis that the assessee had not filed a return within the time specified Under Section 139. For this we relied on the decision of the Calcutta High Court in the case of Presidency Medical Centre (P.) Ltd. v. CIT [1977] 108 ITR 838. In this case it was held that if a return is filed within the time specified by Sub-section (4) of Section 139 of the Income-tax Act, it would be deemed to be in accordance with law and the loss has to be determined and carried forward as a matter of course Under Section 72(1) read with Section 80 of the Income-tax Act even though the return was not filed within the time provided by Section 139(1). However, in the present case, we find that the losses have been determined only in those proceedings where action had been taken Under Section 148 and as the assessing Officer has filed the proceedings, the question of carry forward would not arise.
42. Though some of the grounds raised by the assessee have been decided against the assessee, we have accepted the plea of the assessee on the first issue. Thus, our directions and findings on the other issue will have relevance in case the finding given by us on the first issue regarding sovereign immunity is not found to be correct.
43. Before parting with these appeals, we must place on record our great appreciation of the learned arguments advanced by the counsel for the assessee, Shri G.C. Sharma as well as by the Senior Departmental representative, Shri D.S. Bajpai, who took lot of pains in presenting the case of the Revenue with great force and ability. But for the assistance rendered by both the counsels, it would have been very difficult to resolve the issues involved in these appeals.