K.L. Roy, J.
1. The petitioner in this application is the Assam Consolidated Tea Estates Ltd. (hereinafter referred to as the 'English Company'), a company incorporated in England, which used to carry on business in the manufacture and sale of tea in India and Pakistan and owned several tea estates in these two countries and was assessed in respect of the income therefrom up to the 31st March, 1957. For carrying on the business more conveniently, the petitioner transferred its Indian assets including the tea estates situated in India to Assam Consolidated Tea Estates (India) Ltd. (hereinafter referred to as the ' Indian company '), incorporated in the U.K. for that purpose with effect from the 1st April, 1957. The Indian company was a 100% subsidiary of the English company. The consideration for the transfer of the assets to the Indian company was 6,77,001) and the consideration was satisfied by the allotment to the English company of 4,77,000 ordinary shares of 1 each inthe Indian company and the balance of 2,00,000 by the issue of unsecured loan stock of that amount bearing interest at 6% per annum. For the assessment year 1957-58, the petitioner filed its return showing its income up to the 1st March, 1957, and as the total income shown was nil no assessment order was passed on this return. It is claimed in the petition that thereafter up to the assessment year 1964-65 the interest paid in respect of the unsecured loan stock by the Indian company to the petitioner each year was allowed as a deduction in the assessment of the Indian company in computing its total income and not disallowed on the ground that the tax due thereon accruing to the non-resident petitioner had not been deducted. In the course of the assessment of the Indian company for the year 1965-66 the Income-tax Officer for the first time raised the issue, by his order dated the 23rd February, 1965, of the allowability of the interest paid by the Indian company to the petitioner. The respondent-Income-tax Officer was of the opinion that the said interest was income arising through or from any money lent and brought into India in cash or in kind and was assessable under Section 9(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act').
2. On the 24th February, 1966, the respondent-Income-tax Officer issued notices under Section 148 of the Act in respect of the assessment years 1961-62 to 1964-65 and a notice under Section 139(2) of that Act in respect of the assessment year 1965-66 calling upon the petitioner to submit its return of income for the said years within the period mentioned in the said notices. Along with the said notices the Income-tax Officer forwarded a letter dated the 24th February, 1966, contending that the sum of 2,00,000 lent by the petitioner to the Indian company has been utilised by the said company in its Indian business and as such the interest paid on the said loan was income which was deemed to accrue or arise in India under Section 9(1) of the Act and was taxable in India. A further notice under Section 139(2) in respect of the assessment year 1966-67 was issued on the 27th June, 1966.
3. The petitioner contended before the respondent-Income-tax Officer that the instrument of the loan stock was entered into in U.K. and any money in respect of the loan stock including interest was payable there. The loan stock itself formed the source of the income and was undoubtedly situated outside India. Even assuming that the transaction was a loan, the money lent at interest was never brought into India either by cash or in kind. Further, the assets had all along remained and continued to remain in India. There was thus no scope for the application of Section 9(1) to this case. As the respondent-Income-tax Officer was simultaneously proceeding to make assessments on the Indian company for these years by disallowing the interest paid to the petitioner and also initiating proceedings for imposing penalty for non-deduction of tax at source, a representation was madejointly by the petitioner and the Indian company to the Central Board of Direct Taxes stating, inter alia, their contention that the Income-tax Officer was in error in applying the provisions of Section 9(1) to the interest due on the said loan stock.
4. In the meantime, while the said representation was pending before the Central Board of Direct Taxes, the assessments of the Indian company for the years 1965-66 and 1966-67 were completed and the interest payable to the petitioner in respect of the aforesaid loan was allowed as deduction.
5. On the 20th March, 1967, a further notice under Section 148 of the Act was issued proposing to reassess the petitioner's income for the assessment year 1958-59.
6. By its letter dated the 4th October, 1967, the respondent-Income-tax Officer informed the petitioner that the Central Board of Direct Taxes had decided that the income from interest on the loan stock would be assessable under Section 9(1) as income accruing or arising, whether directly or indirectly through the transfer of capital assets situated in India and as such the interest income of the petitioner had become assessable for all the years. This rule was obtained on the 9th November, 1967, directing the respondent to show cause why an appropriate writ should not be issued for quashing the aforesaid notices under Section 148 and all proceedings held thereunder and an ad interim order for stay was granted by the court.
7. Before I deal with the submission of the learned counsel it would be convenient to set out Section 9(1) of the 1961 Act which is in pari materia with the provisions of Section 42(1) of the repealed Income-tax Act of 1922.
'9. (1) The following income shall be deemed to accrue or arise in India-
(i) all income accruing or arising, 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 or through the transfer of a capital asset situated in India The following definition in the new Act which was not present in the repealed Act also needs consideration, viz.: Section 2(47) which defines 'transfer ', in relation to a capital asset, as including the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.
Dr. Pal, the learned counsel for the petitioner, submitted that in this case no money was lent at interest or the interest therefrom was brought into India in cash or in kind and, therefore, the question of taxing theinterest on the unsecured loan stock did not arise. The source of the interest was the loan granted in England to enable the Indian company to purchase the assets in India. The loan was part of the price paid for the assets. It arose neither from a loan brought into India nor from an asset transferred in India. The source of the interest was the unsecured loan stock and as the loan was made in England and the interest was payable also in England there was no nexus between the interest and assets in India. The Board dismissed the petitioner's contention on the ground that Section 9(1) applied as the interest was income accruing or arising directly or indirectly or through the transfer of capital assets in India. It is submitted that on the transfer of capital assets, namely, the tea estates, the petitioner did not receive the interest as income but had received the shares of the transferee-company and the unsecured loan stock and, as at the material time when the interest was earned, the tea gardens did not belong to the petitioner, they had ceased to form any nexus between the transferor and the transferee-company. It is further submitted that the assets had all along remained in India and, therefore, the question of bringing the money in cash or in kind could never arise. Strong reliance was placed on the following observations of the Supreme Court in Commissioner of Income-tax v. R.R. Ramakrishna Pillai, : 66ITR725(SC) :
'Where the person carrying on the business transfers the asset to a company in consideration of allotment of shares, it would be a case of exchange and not of sale, .... A person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to the transferor. In that case there are in truth two transactions--one a transaction of sale and the other a contract under which shares are accepted in satisfaction of the liability to pay the price. '
The learned counsel argued that in the present case the source of the interest income was a loan granted in England to enable the Indian company to purchase the assets. The source was the unsecured loan stock issued in England and payable there,
8. Dr. Pal next cited the Supreme Court decision in S. Narayanappa's case, : 63ITR219(SC) and pointed out that the court had laid down the following conditions tinder which the Income-tax Officer could issue notices for reassessment :
'Two conditions must be satisfied, namely, (1) that the Income-tax Officer has reason to believe that the income chargeable to tax has escaped assessment; and (2) he must have reason to believe that such escapement had occurred either because of the omission or failure on the part of theassessee to make a return or because of such omission or failure to disclose fully or truly all material facts necessary for his assessment. '
Both these conditions are conditions precedent which must be satisfied before the Income-tax Officer acquires jurisdiction to issue the notice. But if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact which could have a material bearing on the question, that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice of reassessment, The sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. Dr. Pal submitted that no reasonable grounds for the Income-tax Officer's belief exist in this case. It is for the department to show that the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose.
9. Dr. Pal emphasised the fact that during the assessment of the Indian company all the facts relating to the transfer of the assets by the petitioner to the Indian company and the payment of the interest on the unsecured loan stock were disclosed and scrutinised by the same Income-tax Officer who had purported to issue the notice in this case. There is, therefore, no sufficient material in the possession of the Income-tax Officer on which he could have come to any conclusion that the income of the petitioner has escaped assessment and the present attempt to initiate the reassessment proceedings is merely for the purpose of indulging in a fishing enquiry as the department is not quite sure of the basis on which the interest is chargeable to tax. The Income-tax Officer has taken one view while the Board has taken a different view of the particular provisions of Section 9(1) applicable to the case of the petitioner.
10. So far as the impugned notice for the assessment year 1958-59 is concerned, Dr. Pal submitted that, since a valid return for that year had been filed, the Income-tax Officer could not have recourse to reassessment proceedings without having made an assessment on that return. The well known decision of the Supreme Court in Ranchhoddas's case, : 36ITR569(SC) to the effect that where in respect of any year a return has been submitted before assessment, the Income-tax Officer cannot just ignore the return and any notice of reassessment and consequent assessment under Section 34 ignoring the return is invalid, was referred to. Finally, Dr. Pal submitted that there is no material for the Income-tax Officer's reason to believe that any income has escaped assessment. All the necessary facts were placed before him in the assessment of the Indian company particularly the agreement between the petitioner and the Indian company, for the transfer of the Indian assets dated the 1st April, 1959, was produced before the Income-tax Officer inthe course of the petitioner's assessment for the year 1958-59. Lastly, Dr. Pal submitted that, while the agreement between the English and the Indian company undoubtedly constituted a transfer of assets in India, the interest was due not in respect of such a transfer but in respect of a loan of a part of the purchase price and such a loan was neither made in India nor brought into India. If the interest is income arising from the transfer of a capital asset in India, then the dividend in respect of the shares accepted for the major part of the price would also be taxable under Section 9(1) but no attempt has been made to assess such dividend as the income of the petitioner. Dr. Pal was prepared to concede that if the loan was charged on the assets in India some nexus between the interest and the assets in India could legitimately be inferred. Dr. Pal finally submitted that the respondent No. 1 has no prima facie evidence in his possession for his belief that income has escaped assessment and the impugned notices and the proceedings taken thereunder should be quashed. Of the cases cited by Dr. Pal the decision of the Supreme Court in Bacha F. Guzdar's case, : 27ITR1(SC) or in Kunwar Trivikram's case, : 57ITR29(SC) has, in my opinion, no relevance in the present context. In the first case the question was whether the dividend received from a company with agricultural income was itself agricultural income while in the second it was whether the pension granted to a jagirdar and based on a proportion of the net revenue collection of the jagir was agricultural income. In both cases the Supreme Court repelled the assessee's contention and held that neither of these incomes was derived from land and was not agricultural income. What Dr. Pal wanted to stress was that in the second case the Supreme Court had observed that the pension arose from the agreement between the jagirdar and the Government.
11. Dr. Pal also referred to the two decisions of the Supreme Court which are the leading authorities on the question of the Income-tax Officer's jurisdiction to reopen an assessment, viz., the Calcutta Discount Co's. case, : 41ITR191(SC) and Narayanappa's case. The principle established in those decisions is this that the reasons for the belief of the Income-tax Officer that the income has escaped, assessment is justiciable only to the extent that there must be some material for the belief. The sufficiency of the reason is not for scrutiny by the court.
12. Dr. Pal pointed out that the words 'or through the transfer of a capital asset in India' were included in Section 42(1) of the 1922 Act in 1947 when Section 12B imposing tax on capital gains was also introduced, so as to rope in the capital gains derived from the transfer of a capital asset inIndia. Section 2(47) of the 1961 Act denotes what constitutes a transfer of a capital asset also for determining capital gains.
13. Mr. Gupta, for the department, submitted that when the Income-tax Officer issues a notice under Section 148 he only comes to a tentative opinion. He has not arrived at any decision. The jurisdiction of this court under article 226 is more restricted than its reference jurisdiction. A writ in the nature of certiorari which is being asked for in this case can be issued only in two cases, namely, (i) in case of an illegal exercise of jurisdiction ; and (ii) in order to correct errors of law apparent on the face of the record. Errors of fact, though they may be apparent on the face of the record, cannot be corrected (Sri Ambica Mills Ltd. v. S.B. Bhatt, : (1961)ILLJ1SC .
14. In a very recent decision, after a review of the case law on the subject S. P. Mitra J. sitting with S. C. Ghosh J. in Sovachand Mulchand. v. Collector of Central Excise, : AIR1968Cal174 has discussed, inter alia, that:
(1) certiorari can be issued for correction of an error of jurisdiction, e.g., where inferior courts or tribunals have,
(a) acted without jurisdiction, or
(b) in excess of jurisdiction, or
(c) failed to exercise a jurisdiction vested in them.
Certiorari can also be issued where there is an error of law (albeit not an error of fact) apparent on the face of the record, e.g , it is manifest that the conclusion of law made by the inferior court or Tribunal is based on-
(a) an obvious misinterpretation of a statutory provision, or
(b) ignorance of it, or
(c) disregard of it, or
(d) reasons erroneous in law.
Every case must however depend on its own facts or it is inexpedient to lay down any general test to determine what are errors of law apparent on the record. Here, even that stage has not yet arrived. The only question for consideration is whether there was any material for the Income-tax Officer's belief that any income has escaped assessment. In considering this the Income-tax Officer lost sight of, namely, (1) that the petitioner is a non-resident company; (2) that the transferee is a 100% subsidiary of the petitioner and that the consideration for the transfer was satisfied partly by the issue of shares in the transferee-company and partly by the issue of unsecured loan stock. While the factum of the transaction is not disputed, its legal effect is to be determined only to ascertain whether the Income-tax Officer has any reason for his belief.
15. Section 9(1) of the Act is a complicated provision applying to all income accruing or arising whether directly or indirectly, through or from --(a) a business connection in India ; (b) property in India ; (c) an asset orsource of income in India ; (d) and money lent at interest and brought into India in cash or in kind ; or (e) a transfer of a capital asset situated in India. This being a deeming provision it is not enough merely to say that the income does not arise directly through or from any of the sources mentioned in the section. The words of the section are of the widest amplitude, namely, accruing directly, accruing indirectly, arising directly or arising indirectly. The petitioner has tried to sever the two transactions, namely, the transaction of the loan and the transaction of the transfer. Mr. Gupta contended that the interest arising from the unsecured loan stock may be held to arise from either a business connection in India or from money lent at interest and brought into India in cash or in kind or from the transfer of a capital asset in India. In this case the loan was part of the consideration for the transfer and the interest accruing on such a loan can be assessed under either of the above three heads. As a result of this transaction certain rights have been exchanged between the petitioner and the Indian company. The loan was granted to enable the Indian company to pay for the assets which were in India and it may very well be argued that as a result of the transaction assets in India have been transferred. Serious questions as to the scope and effect of Section 9(1) are involved which it is neither convenient nor desirable to decide in an applition under Article 226.
16. Mr. Gupta accepts the proposition that in issuing such a notice the Income-tax Officer's reasons are justiciable to the extent indicated by the Supreme Court both in the Calcutta Discount Co.'s case and Narayanappa's case but contends that it could not be said that the reasons given by the Income-tax Officer are either extraneous or irrelevant to the formation of the belief that income has escaped assessment. It is well-settled now that a notice under Section 148 need not specify the grounds on which the notice is based and the reasons for the Income-tax Officer's belief must be judged by the court in the context of all the circumstances present before him. It was, therefore, submitted that the Income-tax Officer was justified in issuing the notifees as he had reason to believe that the income assessable to tax has escaped assessment.
17. Dr. Pal's contention that the Income-tax Officer could have no reason to believe that the income has escaped assessment as all necessary information and materials in regard to the transfer of the assets by the English company to the Indian company and the issue of the unsecured loan stock were fully investigated by him in the corresponding assessment proceedings of the Indian company has no substance. Apart from the fact that the information might have been available to the Income-tax Officer in the course of the assessment of a different assessee, the following observations of the Supreme Court in A. Raman & Co.'s case, : 67ITR11(SC) is significant:
' That information must, it is true, have come into the possession of the Income-tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby, or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected.'
There is also considerable dispute as to whether all the material facts were disclosed at the time of the petitioner's assessment for the assessment year 1958-59. The fact that the petitioner has failed to file any returns for the subsequent years would justify the Income-tax Officer in issuing notices under Section 148 for these years if he has reasons to believe that any income has escaped assessment. Though there seems to be some justification for Dr. Pal's argument that the words ' through or from transfer of a capital asset in India ' were brought into the Act to rope in capital gains of non-residents, his further submission that the subsequent introduction of the definition of the word ' transfer ' in Section 2(47) of the 1961 Act was also for the same object does not seem to be correct as the said definition is without any limitation.
18. The only ground for challenging the jurisdiction of the Income-tax Officer is whether the Income-tax Officer has reasonable grounds for thinking that there has been any omission or failure on the part of the assessee either to file a return or to disclose any primary material facts in consequence whereof income chargeable to tax has escaped assessment. Whether the grounds are adequate or not is not a matter for this court to investigate (Calcutta Discount Co.'s case and Narayanappa's case). In view of the fact that the petitioner has not filed its return for the relevant years it must be held that the first condition is satisfied.
19. Could it be said that the reasons given by the Income-tax Officer for his belief that the interest income is assessable under Section 9(1) and has escaped assessment due to the failure of the assessee to file its return are extraneous or irrelevant I agree with Mr. Gupta that the question whether the interest due on the unsecured loan stock is assessable under Section 9(1) of the Act or not is not within the scope of this application. This court has only to be satisfied that the impugned notices are on their face erroneous and/or that the issuing Income-tax Officer had no material for his belief that any income has escaped assessment due to any omissionor failure on the part of the assessee either to file its returns or to disclose the primary material facts necessary for such assessment. In this case there is no dispute that apart from the assessment year 1958-59 no returns were filed by the assessee. Whether the Income-tax Officer should have made enquiries on the basis of the information received in connection with the assessments of the Indian company is not germane to the present question. It is for the assessee to file returns and furnish the necessary particulars. Very difficult questions of the interpretation and application of the provisions of Section 9(1) of the Act have been raised and issues have been joined in respect thereof. These are matters for decision by competent tribunals and courts and cannot conveniently be decided by this court in its writ jurisdiction. However, the case of the impugned notice for the assessment year 1958-59 is quite different. The point is covered by the decision of the Supreme Court in Ranchhoddas's case and it must be held that the Income-tax Officer exceeded his jurisdiction in issuing that notice. The rule would, therefore, be made absolute only in the case of the notice for the assessment year 1958-59 while it would be discharged in respect of the notices for the other years. The interim orders, if any, except for those applicable to the assessment year 1958-59, are vacated. There will be no order as to costs of this application. Operation of this order is stayed till a week after the long vacation.