1. The petitioner is a company incorporated under the laws of the United States of America and carries on in India the business of dealing in and manufacturing data processing machines. The petitioner has its headquarters at New York and is a subsidiary of International Business Machines Corporation which carries on business wholly outside the United States. Apart from its global headquarters in New York, the petitioner has established a number of area headquarters, each of which exercises control over those branches which are situated within the geographical jurisdiction. The normal chain of reporting is from branch to area headquarters and then to New York headquarters. The expenses incurred by the New York headquarters include the expenditure incurred by way of interest on monies borrowed for the benefit of its various branches. In the case of any branch, the total of the headquarters expenses incurred by the New York headquarters and the administrative expenses incurred by the area headquarters are termed as the 'headquarters expenses'. The headquarters expenses are allocated amongst the branches and each branch is allocated such proportion of the total headquarters expenses as is equal to the proportion of its gross revenue. As regards the expenses incurred by the relevant area headquarters, the same is allocated to a branch in the proportion of the branch's gross revenue to the total gross revenue earned by all the branches coming under that area headquarter. The petitioner had been claiming deduction for its proportionate share of headquarters expenses for the purposes of assessment of income-tax right from the year of its inception, i.e., from the assessee year 1954-55. The petitioner had been showing the said expenses in the accounts of its Indian branch as a separate item.
2. Up to the end of the year 1965, the petitioner's Indian branch came under the charge of and received management, technical and administrative support from the Asia Pacific Headquarters located, inter alia, in Manila and later in Tokyo. At the end of the year 1965, an India Region Officer was formed in India for providing support and guidance in respect of the business carried out in Sri Lanka, Bangladesh, Nepal and Afganisthan. The Indian branch, though continued to receive support from the Asia Pacific Area Headquarters till the year 1970, commenced to report to the petitioner's headquarters in New York through the newly formed Indian Region Office.
3. By April, 1974, the petitioner's assessments for the assessment years 1959-60 to 1973-74 were complete. The assessment for the years 1973-74 was complete on March 13, 1974. After the year 1965, the petitioner's accounting department in New York ceased to allocate to the Indian Branch a share of the Area Headquarters expenses and commenced to charge to the Indian Branch a portion of the expenses incurred by the Indian Region Office. This course was obviously erroneous because the Indian Branch continued to derive support from the Area Headquarters and should have been allotted the share of the Area Headquarters expenses. As a result of the error, the petitioner's Indian Branch claimed and was allowed for by assessment years 1967-68 to 1973-74, a larger deduction by way of headquarters expenses that was entitled to. The petitioner claimed that the error was detected in or about September, 1974, and thereupon by letter dated November 22, 1974, addressed to the Commissioner of Income-tax, a full and voluntary disclosure of the error was made and the relief of waiver of penalty under s. 271(4A) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), was sought. The petitioner also paid additional amount of tax for the relevant years on the recomputation made by the petitioner. After this disclosure, the petitioner was served with notices under s. 148 of the Act by the I.T. authorities on January 5, 1976, for escaped assessment for the assessment years 1967-68 to 1973-74. On March 18, 1976, the petitioner was served with the notices under s. 148 of the Act for assessment year 1959-60, while another batch of notices was served on October 16, 1976, for the assessment years 1960-61 to 1966-67. Some correspondence took place between the petitioner on the one hand and the I.T. authorities addressed several letters to the petitioner seeking information in respect of assessments which had been already completed for the assessment years 1959-60 onwards. The petitioner has thereafter approached this court on February 16, 1978, under art. 226 of the Constitution of Indian and the relief sought is for quashing the impugned notices given under s. 148 of the Act and restraining the I.T. authorities from taking any steps or proceedings in pursuance of the said notices. The petitioner has also claimed for a writ of mandamus restraining the I.T. authorities from reassessing the petitioner in respect of any item other than that in respect of which the imp urged notices were received. In answer to the petition, the respondents have filed a return dated September 12, 1980, sworn by Shri S. K. Tyagi, Inspecting Assistant Commissioner of Income-tax, Foreign Companies Range I, Bombay.
4. It would be convenient to consider the grievance of the petitioner, first in respect of the notices served for the assessment years 1959-60 to 1966-67. Shri Pradhan, the learned counsel appearing on behalf of the I.T. authorities, made it clear that all the notices were issued only under s. 147(a) of the Act. Section 147 of the Act provides for assessment of escaped income. Clause (a) reads as under :
'147. If -
(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax 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.....
he may, subject to the provisions of section 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 sections 148 to 153 referred to as the relevant assessment year)'
5. A plain reading of this clause makes it clear that the ITO can reopen the assessment provided he has reason to believe that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts, the income chargeable to tax has escaped assessment for that year.
6. Shri Dastur, the learned counsel appearing in support of the petition, submitted that for the assessment years 1959-60 till 1966-67, the details of the head office expenses were furnished to the ITO before completion of the assessment. The learned counsel also pointed out that not only the details but the mode of computation was furnished and the petitioner answered all the queries put by the ITO in respect of its computation. The learned counsel also relied upon the letter dated August 28, 1970, wherein the petitioner had informed the ITO about the details of the head office expenses and its mode of computation. The learned counsel submitted that s. 147(a) of the Act has no application on the set of facts available in respect of the threatened action of the ITO for the assessment years 1959-60 to 1966-67, as there was no failure on the part of the petitioner to disclose any relevant facts. The learned counsel also invited my attention to the reasons recorded by the ITO for reopening the assessment. Exhibit 1 and Ex. 2 annexed to the affidavit-in-rejoinder swarm by Subrahmanyam Sundar Raman on August 28, 1981, sets out the reasons furnished by the ITO. The perusal of these two exhibits indicates that on receipt of letter dated November 22, 1974, from the petitioner, the ITO felt that the headquarters expenses claimed by the assessee is not based on actual services or benefits obtained by the Indian branch but based on the ratio of Indian branch's turnover to the world turnover of the branches and subsidiaries. The IAC felt that the expenses claimed for the relevant years are unduly excessive and not for the business of the Indian branch. The officer felt that though India branch is entitled to some amount towards the expenses, what was claimed was the excessive amount and the excess claimed has resulted in the escapement of income liable for assessment.
7. Shri Dastur complained that the reasons furnished to not indicate that the ITO had reason to believe that there was any omission or failure on the part of the assessee to disclose fully and truly all material facts and such failure had led to the escape (of income liable to be) assessed for a particular year. Shri Dastur also submitted that the change of opinion of the ITO is on the strength of facts which were available to the officer at the time of the earlier assessment. The submission of the learned counsel deserves acceptance. The reasons furnished by the IAC do not disclose that any relevant material facts were not disclosed by the petitioner at the time of completion of the assessment. It is now well settled that it is not a mere change of opinion which would enable the I.T. authorities to exercise the jurisdiction under s. 147(a) of the Act. The reasons furnished by the ITO must disclose as to what material the assessee failed to disclose at the time of completion of the assessment. In my judgment, the notices issued by the I.T. authorities for reopening the assessment for the assessment years 1959-60 till 1966-67, are totally unsustainable. In fact, it is not in dispute that the India Head Office was opened only at the end of the year 1965 and the mistake which was disclosed by the petitioner by their letter dated November 22, 1974, was only in respect of assessment years 1966-67 onwards. In these circumstances, the assumption of the I.T. authorities that the assessee has failed to disclose relevant material, because of the letter dated November 22, 1974, is totally erroneous and the consequential notices served under s. 148 of the Act for the assessments years 1959-60 till 1966-67 will have to be quashed.
8. That takes me to the notices issued for the assessment years 1967-68, onwards till the assessment year 1973-74. Shri Dastur has raised a threefold contention to challenge the legality of the notices issued for these relevant years. The first submission of the learned counsel is that s. 147(a) of the Act had no application unless it is established that the escapement of income on the part of the assessee was wilful. Before considering the submission of the learned counsel, it is necessary to make a reference to the reasons given by the IAC for reopening of the assessment. A copy of the reason furnished is annexed as Ex. 3 of the affidavit-in-rejoinder. The Officer has set the contents of the voluntary disclosure petition field by the petitioner under s. 271(4A)(ii) of the Act and thereafter it is observed that the net effect of the alleged error is that there has been an excess charge of headquarters expenses allocable to India of Rs. 8,93,365 for the accounting year 1966. The expenses varied in respect of every subsequent year till the assessment year 1973-74. The Officer thereafter has stated that he had reason to believe that by reason of omission or failure on the part of the assessee to disclose all material facts, the income chargeable to tax has escaped assessment and, therefore, the Officer proposes to reopen the above assessment.
9. Shri Dastur strongly relied upon the letter dated November 22, 1974, addressed by the petitioner to the Commissioner and claimed that the fact that the petitioner voluntarily disclosed the mistake indicates that the petitioner had no knowledge of the said mistake till its disclosure and, therefore, it could not be that there was wilful default on the part of the assessee to attract the provisions of s. 147(a) of the Act. The submission proceeds on the ground that unless the Department establishes that the assessee knowingly and intentionally withheld certain material or fact relevant for the proper assessment, it is not permissible to reopen the assessment. The perusal of letter dated November 22, 1974, indicates that the writer of the letter has merely stated that on September 27, 1974, the error in (adopting) the principle of allocation headquarters expenses of India have been detected. Save and except this averment, the letter makes no reference as to why the mistake was not detected earlier and the reason why the mistake could not have been discovered by simple precaution. Realising this fact Shri Dastur relied upon the letter dated November 1, 1974, addressed by Shri. G. R. Williamson, New York, to the representative of the petitioner in New Delhi. This letter, claims Shri Dastur, was annexed to the letter addressed by the petitioner to the Commissioner on November 24, 1974. The letter dated November 1, 1974, is obviously an internal correspondence between the officers of the petitioner and it is not possible to accept every statement made therein as a gospel truth. It is possible that the petitioner, before disclosing the alleged mistake, has prepared some record to substantiate their claim that they were not aware of the error. The letter dated November 1, 1974, inter alia, mentions that on a query made by Shri Pillai on August 2, 1974, in respect of enquiry by the Reserve Bank of India in respect of 1971 headquarters remittance request, the error was detected. The letter does not recite as to how in the first instance such error was committed and why it was not detected earlier or why precautions were not taken to avoid the error. Both the letters relied upon are totally silent as to why the mistake was not detected earlier. The alleged mistake, according to the petitioner, was committed right from the year 1967-68 till the year 1973-74. The period covered is quite substantial and it is not clear why the petitioner, who is running a huge concern having branches all over the world could not find the mistake, even if there is one, for such a long duration. On behalf of the Department, it was contended that on receipt of the letter dated November 22, 1974, the Officer rightly believed that the petitioner had not disclosed certain relevant material at the time of completion of the assessment and, therefore, the income chargeable to tax had escaped assessment. The claim is not without merit.
10. Shri Dastur urges that as the petitioner was not aware of the mistake till September, 1974, the question of not disclosing any relevant material facts does not arise. It support of this submission, the learned counsel placed reliance upon the decision of this court in the case of CIT v. Balvantrai S. Jain : 72ITR59(Bom) . In the case before the Division Bench of this court, the assessee had joined as partner of the firm in the year 1941 and had made full disclosure of the partnership in the return for the assessment year 1942-43. In the return filed for the subsequent years, Part III was not filled up and the return did not contain information about the partnership but the assessee had informed the Department that there was dispute regarding the partnership and the High Court had decided that the assessee had 8 annas share in the partnership but the firm had incurred the losses. The assessee claimed the share of loss and it was disallowed. The assessment for the year 1944-45 was completed without taking into account the assessee's share of profits as the assessment of the firm was not completed. After completion of the assessment which showed a profit, the notice under s. 34(1)(a) of the Indian I.T. Act, 1922, was issued. The High Court held that as the assessment for the year 1944-45 was completed long before the firm's profits were assessed, the assessee could not be said to have failed to disclose the fact as he had no knowledge of the fact. Shri Dastur submits that in the present case the petitioner had no knowledge of the mistake when the assessment was completed as the mistake was detected only in September, 1974. The question whether the mistake was detected in September, 1974, or earlier is a pure question of fact and it is not possible to decide the debatable question in these proceedings under art. 226 of the Constitution of India. The respondents have not accepted the claim that the mistake was detected only in September, 1974. Shri Dastur submits that though it is not permissible for this court to decide the disputed questions of fact, this court must consider the circumstances present in the case and record a finding that the mistake was detected only in September, 1974. I am afraid that it is not possible for this court to do so. It is true that in the return field by the respondents it is not mentioned that the petitioner was conscious all throughout about the alleged mistake, but the mere absence of such an averment would not lead to the conclusion that the disclosure was not voluntary but prompted by fear of exposure due to enquiries conducted by the Govt. of India in the affairs of the petitioner. The question whether the petitioner was not aware of the mistake before the completion of the assessment or otherwise must be left for the determination of the ITO and cannot be answered in favour of the assessee in the present proceedings. The learned counsel also relied upon the decision in the case of M. O. Thomakutty v. CIT : 47ITR872(Ker) , but in my judgment that decision would not take this case any further. The conclusion of the ITO that he had reason to believe that by reason of omission or failure on the part of the assessee to disclose the material facts led to the escapement of income chargeable to tax cannot be termed as perverse or unsustainable. The information was furnished by the petitioner and the view taken by the ITO in the strength of that cannot be said to be totally unsustainable or unreasonable.
11. Shri Dastur submitted that the proceedings commenced by the impugned notices are required to be struck down on the ground that the respondent No. 1 commenced the proceedings without obtaining the requisite section under s. 151 of the Act from the Commissioner. Section 151 which provides for sanction prior to issue of notice under s. 148 of the Act reads as under :
'151. (1) No notice shall be issued under section 148, after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.
(2) No notice shall be issued under section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.'
12. The petitioner claims that the notices were issued by the ITO without obtaining a sanction from the Commissioner and, therefore, the notices are required to be struck down. Shri Dastur also claimed that in spite of the notice given to the respondents, the respondents have failed to give an inspection of the order of sanction given by the Commissioner. At the hearing of this petition, Shri Pradhan, the learned counsel appearing on behalf of the respondents, produced for my perusal the original file containing the sanction obtained under s. 151 of the Act prior to the issuance of the notices. It is obvious that the requisite sanction was secured before the respondent No. 1 took the action of issue of notice. Shri Dastur then submitted that in any event the sanction is not valid because the order does not disclose an application of mind by the Commissioner. In support of this submission, reliance is placed on the decision in the case of Johri Lal v. CIT : 88ITR439(SC) . It is not possible to accept the submission of the learned counsel. While granting the sanction, the requisite papers were produced before the Commissioner and it must be presumed that the Commissioner has gone through the papers before the grant of sanction. The Commissioner is not expected to write a long detailed order assigning reasons for the grant of sanction, but the Commissioner is merely required to be satisfied that the ground exists for taking the proceedings under s. 148 of the Act after the expiry of four years from the end of relevant assessment year. An officer of the rank of Commissioner must be presumed to apply his mind and the submission that the sanction was given in a mechanical fashion cannot be accepted. The notices cannot be quashed on the ground of want of sanction.
13. Shri Dastur then submitted that even assuming that the ITO had jurisdiction to serve notices under s. 148 of the Act by resorting to the provisions of s. 147(a) of the Act, still the exercise of jurisdiction is not bona fide and the action taken is merely a cloak to reopen the assessment in respect of other items also. It was urged that the fact that the information is sought by the ITO in respect of several items about the completed assessment is indicative of the fact that the officer does not propose to restrict the enquiry only to the head office expenditure but proposes to reopen the assessment on all counts. The learned counsel complained that the enquiry undertaken by the Officer is of a fishing nature and that is not permissible under the law. In support of this submission, reliance is placed on the decision in the case of Madhya Pradesh Industries Ltd. v. ITO : 57ITR637(SC) . I find considerable merit in the submission of the learned counsel. The bunch of letters annexed to the petition from pages 103 onwards clearly indicates that the Officer desired the petitioner to produce all records and material not only in respect of head office expenditure but in respect of other items covered under the completed assessment. The grievance of the learned counsel that this is nothing but a roving and fishing enquiry and the officer desired to gather the information without any basis is justified.
14. Shri Dastur then submitted that if the officer serves a notice under s. 147(a) of the Act in respect of the item of head office expenditure, then the enquiry must be restricted only to that item and the reassessment cannot be in respect of other items set out in the return of the respective years. Shri Pradhan, on the other hand, submits that once the officer exercise jurisdiction to reopen the completed assessment, then the investigation is not limited to the items set out in the reasons furnished under s. 147(a) of the Act but it is open to the officer to pass an assessment order in respect of every item. Shri Dastur in support of his submission relied upon the decision of the Kerala High Court in the case of M. O. Thomakutty v. CIT : 47ITR872(Ker) , and the decision of this court in the case of New Kaiser-I-Hind Spg. and Wvg. Co. Ltd. v. CIT : 107ITR760(Bom) . In my judgment, the submission of Shri Dastur that the Officer has no jurisdiction whatsoever to reconsider the correctness of the assessment in respect of other items is not justified. The reliance placed by Shri Pradhan on the decision of the Supreme Court in the case of V. Jaganmohan Rao v. CIT : 75ITR373(SC) is very appropriate. The Supreme Court, while considering the scope of s. 34 of the 1922 Act, held :
'Once proceedings under section 34 are validly initiated the jurisdiction of the Income-tax Officer is not restricted to the portion of the Income that escapes assessment. Section 34 in terms says that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income profits or gains. Therefore, once assessment is reopened by issuing a notice under subsection (2) of section 22 of the previous under-assessment is set aside and the whole assessment proceedings start afresh. Once valid proceedings are started under section 34(1)(b) the Income-tax Officer not only had the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year.'
15. From this decision of the Supreme Court, it is obvious that the submission of Shri Dastur that the reopening of the assessment must be restricted only to the item referred in the reasons given for a reopening of the assessment is not correct. Shri Pradhan very rightly relied upon the decision of the Calcutta High Court in the case of CIT v. Ramsevak Paul : 110ITR527(Cal) , where the Calcutta High Court after considering the Supreme Court decision found that once the reassessment proceeding has started, it is the duty of the ITO to levy tax for the entire year and, therefore, the ITO was entitled to recompute the income of the assessee, though the reassessment proceedings had been initiated to include property income that had escaped assessment.
16. Shri Dastur then submits that event assuming that it is open to the ITO to reassess in respect of items not set out in the notice under s. 147(a) of the Act, still the Officer should not be given a free hand to make an enquiry in respect of every item under the return, without there being material to have a reasonable belief that the earlier computation was defective. The submission of the learned counsel is just and fair. It is true as held by the Supreme Court that while the reassessment proceedings commenced, it is open to the ITO to recompute the assessment of all items that were earlier concluded, yet that does not necessarily give an absolute right to the ITO to make a roving or fishing enquiry. The ITO is entitled to call upon the assessee to produce material or facts relating to the item in respect of which the proceedings were initiated. During the course of enquiry, if the ITO comes to a reasonable belief that the income liable to tax has escaped assessment for non-disclosure of information by the assessee, then it is permissible for the officer to give a proper notice to the assessee in that connection and then consider whether the income should be recomputed. Merely because the Officer finds that in respect of one item of the concluded assessment he can exercise jurisdiction under s. 147(a) of the Act, the Officer should not call upon the assessee to disclose all material facts in respect of each and every item covered by the concluded assessment. In the present case, it is obvious that the ITO, without any reason to believe that income under any other head escaped assessment, has issued various notices to the assessee calling upon them to produce material. This action of the Officer is entirely unsupportable. The ITO is not entitled to call upon the assessee to produce material unless he had reason to believe that by reason of the omission or failure on the part of the assessee to disclose all material facts necessary for the assessment, income chargeable had escaped assessment, and it is not permissible to make a roving enquiry. It is made clear that in case during the proposed enquiry of assessment of the head office expenditure the Officer comes across facts which lead him to believe that the situation exists as contemplated under s. 147(a) of the Act in respect of some other items, then the Officer may serve a notice on the assessee and call upon him to furnish the requisite material but as long as that situation does not exist, the Officer is entitled to call upon the assessee to produce only that material which is relatable to the item set out in the reasons given for reopening the assessment. Save and except this clarification, the petitioner is not entitled to any relief in respect of the notices served for the assessment years 1967-68 till 1973-74.
17. Accordingly, the petition partly succeeds and the notices served by the respondents under s. 148 of the Act for the assessment years 1959-60 till 1966-67 are quashed and the respondents are restrained from adopting any proceedings in pursuance of those notices. The relief sought by the petitioner in respect of notices for the clarification made in connection with the material which the Officer can call upon the assessee to produce. In the circumstances of the case, there will be no order as to costs.