1. By this petition, filed under art. 226 of the Constitution of India, the petitioners are challenging the legality of the notice under s. 148 of the I.T. Act, 1961 (hereinafter referred to as 'the Act'). The notice dated May 3, 1978, was served upon the petitioners by respondent No. 1 - the ITO.
2. The petitioners are a private limited company carrying on business as engineering the technical consultants offering a wide variety of consultancy services. The petitioners enter into various contracts and claim the benefit under the provisions of s. 80MM of the Act. The benefit of the section is claimed only in respect of the know-how covered by the clauses in the contract. The petitioners have an operation department which prepares, in respect of each consultancy contract, a man-hour budget sheet which allocates man-hours for each activity to be performed under the contract. It is then possible to ascertain the man-hours which will be expended on the specific activities covered by the clauses approved by the Board as being eligible for the benefit of s. 80MM of the Act. Section 80MM of the Act provides that the assessee has to file application for approval of receiving the benefit and the application for approval must be made to the Board before the 1st day of October, of the relevant assessment year.
3. In respect of the assessment year 1974-75 the petitioners received a total sum of Rs. 19,15,186 as and by way of fees in respect of various consultancy contracts that have been entered into with different parties. The return of the income was to be submitted on or before July 31, 1974, and at that joint of time the petitioners had not received from the Board intimation of the approval of their consultancy contracts for the purpose of benefit under s. 80MM of the Act. In the absence of the approval, the petitioners claimed deduction under s. 80MM of the Act at 40% of the figure of gross fees from the consultancy contracts. The return clearly indicates that the calculation was based on the gross fees and the petitioners would claim the relevant benefit after the approval is received. The approval was received in July, 1975, and thereafter the petitioners prepared a statement showing the details of the claim under s. 80MM of the Act. In the statement the petitioners arrived at a figure of Rs. 8,14,213.51 as the proportionate gross revenue received during the relevant accounting year. The petitioners, accordingly, claimed a deduction of Rs. 3,25,685, being 40% of the said proportionate gross revenue of Rs. 8,14,213.51.
4. The ITO held several hearings in respect of the assessment in the year 1974-75, and ultimately the assessment was completed by an order dated January 29, 1976. The ITO allowed the petitioners' deduction under s. 80MM of the Act at 40% of Rs. 8,14,214 but, however restricted the total amount of this deduction to Rs. 1,39,846.
5. The petitioners preferred an appeal to the AAC, N-Range, Bombay, and at the same time filed an application for rectification before the ITO. The ITO rectified the order on March 2, 1976, in exercise of the powers under s. 154 of the Act and re-worked the deduction under s. 80MM of the Act at the figure of Rs. 2,07,049, that is, to the extent of the petitioners' gross total income. On June 11, 1976, and ITO passed another rectification order, and the deduction under s. 80MM of the Act was allowed to the extent of the gross total income then available by a reduction of Rs. 20,000. The appeal preferred by the petitioners was disposed of by the AAC, and respondent No. 1 passed an order giving effect to the order of the AAC. The deduction under s. 80MM of the Act was further reduced to the extent of the gross total income then available, which was Rs. 1,72,241.
6. Certain correspondence took place between the petitioners and respondent No. 1 and respondent No. 1 was enquiring as to whether the deduction of Rs. 1,72,241 allowed under s. 80MM of the Act has been calculated on the gross consultancy fees or on the net receipts received by the petitioners. Respondent No. 1 thereafter served the impugned notice on May 3, 1978. The notice does not disclose the ground which appealed to the ITO to reopen the assessment, nor the demand made by the petitioners for furnishing the grounds was complied with. The petitioners have, therefore, approached this court by filing the present petition.
7. Shri Dastur, the learned counsel appearing in support of the petition, has made a two-fold submission to challenge the legality of the notice. The learned counsel submitted that the assumption of the ITO that the deductions under s. 80MM of the Act are to be worked out on the basis of the net receipts for rendering appropriate consultancy services is wholly incorrect and contrary to the decisions of the Supreme Court. Secondly, Shri Dastur urges that the exercises of power by the ITO under s. 147 of the Act was without any basis, and the course adopted by respondent No. 1 is nothing short of change of opinion. In my judgment, both the submissions of the learned counsel deserve acceptance. Shri Dastur relied upon the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT : 118ITR243(SC) . The Supreme Court, on page 260 of the report, considered the contention with reference to s. 80MM of the Act and observed :
'It appears on a plain reading of these sections that the deduction admissible is in respect of the whole of the income received by the assessee and not in respect of the income computed after making the deductions provided under the Act.'
8. Reference was made to Madras Auto Service case : 101ITR589(Mad) and Addl. CIT v. Isthmian India Maritime P. Ltd. : 113ITR570(Mad) .
9. From the judgment of the Supreme Court it is crystal clear that the assumption of the ITO that the deduction under s. 80MM of the Act has to be allowed on the basis of net receipts was totally unsustainable. The impugned notice requires to be struck down on this count alone.
10. The submission of Shri Dastur that the assumption of jurisdiction under s. 147 of the Act by respondent No. 1 was without any basis and was totally misconceived also requires acceptance. The notice does not set out any reasons which prompted the ITO to exercise the jurisdiction. The queries made by the petitioners about the material in possession of the respondents to come to the conclusion that the case was one of the escaped assessment were not answered. The respondents have not filed any return in answer to the petition, and in such circumstances it is impossible to hold that the requirements of s. 147 of the Act are complied with. In these circumstances, the impugned notice is required to be quashed.
11. Accordingly, the petition succeeds and the rule is made absolute in terms of prayer (a) of the petition. In the circumstances of the case, there will be not order as to costs.