K.L. Roy, J.
1. The petitioner is a company incorporated under the U. K. Companies Act and has its principal place of business of India atDigboi in the State of Assam. It carries on business, inter alia, in oils andlubricants. In its assessment under the Indian Income-tax Act thepetitioner claimed deduction of certain expenses as administrative chargesincurred by the Burma Oil Company Ltd. of London as the Londonmanagement fee payable by the petitioner and debited in its account. Itappears that from the assessment year 1951-52, the question of allowanceof this claim was being discussed between the petitioner and the taxing authority. For instance, in its letter dated the 20th February, 1953, to theIncome-tax Officer, Dibrugarh, who was then making the petitioner'sassessments to income-tax, it was explained that the London charges represented the charge made by the Burma Oil Company for management andsecretarial work carried out on behalf of the petitioner in London and thecharge was for certain services rendered by the London company. The saidIncome-tax Officer by his letter dated the 19th December, 1952, requiredthe petitioner to furnish a schedule in respect of the London charges andalso to let him know if any reserve had been debited to this account. Byits letter dated 9th December, 1953, the petitioner record the discussionheld between the Commissioner of Income-tax, Central, Calcutta-cum-Assam, and the petitioner-company relating to the London office chargesamounting to 1,00,000 and explained that the said amount representedapproximately 40% of the head office expenses of the London company andthat it had been advised by its London office that the amount representeda reasonable allocation having regard to the amount of the work done onbehalf of the petitioner. Apparently, the taxing authority was satisfiedwith this explanation and no further questions were raised regarding theallowances of the claim for deduction. Again, for the assessment year1954-55, the said query was raised by the Income-tax Officer, Dibrugarh, inregard to the claim of 1,10,000 debited in the account under the head'London office charges'. Similar query was raised for the assessmentyear 1955-56 by the said Income-tax Officer by his letter dated 8thOctober, 1956, regarding a similar claim for deduction of 1,10,000 andrequiring the petitioner to let the Income-tax Officer know the details ofthe services rendered and asking for the copies of the correspondence between the petitioner and the parent-company regarding the fixation of thatamount. By its letter dated 14th November, 1956, the petitioner suppliedthe said Income-tax Officer with details of the services rendered by theLondon company and further stated that the charge of 1,10,000 represented its share of the salary, wages, fees, rates, rent and taxes, insurance and other expenses incurred at the head office. The next letter is dated 19th June, 1957, from the Income-tax Officer, Central Circle V, Calcutta, to whom the petitioner's file had in the meantime been transferred. In this letter one of the items on which information was asked for was as follows :
'You have stated that you do not have correspondence with the parent-company in the matter of allocation of London office charges. Please explain the basis of the allocation and how it was fixed at 1,10,000 for the year 1953.'
2. There was a further communication from the respondent-Income-tax Officer to the petitioner-company dated 3rd January, 1958, in which, inter alia, the respondent had stated that, as the petitioner had not yet informed him as to what its London office had to say about the basis on which the amount of 1,10,000 had been arrived at, in the absence of the required particulars the respondent would have to disallow a part of the expenses claimed and also to capitalise a portion of the remaining part as relating to purchase of plant and machinery. In its reply dated the 16th January, 1958, the petitioner informed the respondent that it was not in a position to add to the explanations given in respect of the London office charges as it did not have any office or staff in London. The procedure for fixing the charge was explained as follows :
3. At the end of the year, Burmah Oil Co. Ltd. estimates how much of the total expenditure it has had to incur to co-ordinate the activities of all the group companies is applicable to each company. This is not allocated on any fixed mathematical basis, but in proportion to the time which has been spent on the various companies' affairs, etc.
4. The last letter in this series is the letter by the respondent-Income-tax Officer to the petitioner in respect of the assessment years from 1954-55 onwards dated 26th 'December, 1958, asking the petitioner to obtain the relevant certificate from the head office auditors regarding the reasonableness of the expenses allocated by the Burmah Oil Co. Ltd. to the petitioner for supervision and control of expenses incurred in the U. K. Thereafter, some time in January, 1959, the assessments for the years 1953-54 to 1958-59 were completed by the respondent-Income-tax Officer. The assessments for the years 1957-58 and 1958-59 were made more or less on the basis of the profit and loss account of the petitioner for these years, in which the London office charges had been debited. These assessments were subsequently rectified in order to give effect to certain appellate orders under Sections 31 and 33A in February, 1962, but the revised orders have no bearing so far as this application is concerned.
5. It appears that some queries with regard to the London management charges were again raised for the assessment year 1959-60. The petitioner by its letter dated 27th June, 1961, explained, as before, that the said claim represented that part of the total managerial expenses of the Burmah Oil Company Ltd. in London which was allocated to each of its subsidiary companies and which was based on a proportion of the total work carried out in London for that subsidiary and that such charges for the year 1958 amounting to 2,50,000 was passed on to the petitioner. Thereafter, the petitioner's assessment for 1959-60 was completed on the basis of its profit and loss account which had debited the said amount of London management expenses.
6. The respondent-Income-tax Officer addressed three letters, each dated 21st October, 1965, to the petitioner in respect of the assessment years 1957-58, 1958-59 and 1959-60, respectively, pointing out that during the assessment for the year 1963-64, the petitioner had furnished, in support of its claim for London management expenses, a certificate from the London auditors that the sum specified in the certificate was reasonable having regard to the records and materials produced before the auditor. The certificate revealed that the reasonable charge in relation to the total administrative expenses incurred by the Burmah Oil Co. Ltd., London, was about 10 per cent. The respondent further found that such expenses debited actually in the earlier years were far in excess of this percentage. The petitioner was, therefore, required to furnish a similar certificate for each of the aforesaid three years based on an examination of the records and materials failing which he would be constrained to conclude that the claim by way of London management fee was excessive and arbitrary. A reply was asked for within a fortnight from the receipt of the letter. On the 3rd November, 1965, the petitioner replied that the time allowed was quite inadequate and asked for further time and for a discussion of the matter with the respondent. It appears that, thereafter, no such certificates were produced by the petitioner and by three several notices all dated 25th November, 1965, purported to be under Section 148 of the Income-tax Act, 1961, the respondent-Income-tax Officer notified the petitioner that, as he had reason to believe that its income chargeable to tax for each of the aforesaid three years had escaped assessment within the meaning of Section 147 of the Act, he proposed to reassess the income for the said years and required the petitioner to deliver, within 30 days from the date of the service of the notice, returns in the prescribed form. The notice also mentioned that it was being issued after obtaining the necessary satisfaction of the Commissioner of Income-tax, Central, Calcutta. The form of the notices shows that the notices were issued under Section 147(1)(a) of the said Act.
7. Before I deal with the cause shown to this rule, it would be interesting to notice the different Income-tax Officers who had made the assessments, issued the impugned notices and showed cause to this rule. The assessments for the years 1957-58 and 1958-59 were made by Sri D. G. Pradhan and that for 1959-60 was by Sri G. P. Gupta while the notices under Section 148 were issued by Sri P. S. Gopala Krishnan and the affidavit-in-opposition showing cause has been affirmed by Sri Panjwani, all successive incumbents of the office of the Income-tax Officer, Central Circle V, Calcutta. I have given the above list in order to stress again the fact as to how negligently and carelessly cause is shown by the department against a rule issued by this court. The respondent-Income-tax Officer who affirmed the affidavit-in-opposition could only make the statements on the basis of information received from the records and the only way he has shown cause is by repeating that in view of the materials on the record he has reason to believe that due to the failure and/or omission of the petitioner to disclose fully and truly all material facts the petitioner's income has escaped assessment and/or has been under-assessed, and that he, bona fide, believes the same. Nothing else has been stated in the said affidavit. This court has on several occasions in the past drawn the attention of the department to the unsatisfactory nature of the affidavits filed on its behalf and recently the practice has grown up of the departmental representative asking for the leave of the court to file further and better affidavits, if possible, by the officer who made the original assessment or at least by the officer who issued the notice. In this case no such attempt has been made and I would have been inclined to make the rule absolute on the ground that no cause has been shown but for the fact that the learned counsel for the respondents has produced for my inspection the records of the case and particularly the report made by the respondent-Income-tax Officer to the Commissioner for obtaining sanction under Section 143 of the Act, a copy of which has been supplied to me. In the said report the respondent-Income-tax Officer (Sri Gopala Krishnan) has pointed out that for the assessment year 1963-64 it was found from the report of the London autitors that the management fee charged by the Burmah Oil Co. Ltd., London, was about 10 per cent. of its total administrative charges and that the auditors certified the percentage as reasonable. The report continues that a perusal of the earlier records of the assessee revealed that in the years prior to the assessment year 1963-64 it had been claiming by way of London management fee amounts far in excess of the 10 per cent. certified by the auditors as reasonable. The assessee-company was, therefore, required to produce similar certificates for the earlier years but it had failed to do so on the ground that no records were maintained by the parent-company on the work relating to the assessee's affairs. The allocation of London management fee was thus arbitrary and devoid of any basis and was only a means of avoiding taxation by debiting excessive sums by way of management fees unrelated to the extent of the services rendered. By reason of the assessee's failure to disclose the correct facts its income had been found to have escaped assessment and sanction to reopen the same was, therefore, requested. The amount of London management fee debited in excess is shown at 1,13,000, As the petitioner was similarly informed by the respondent's letter dated 21st October, 1965, that he considered the assessee's claim for deduction of the London management expenses in the past years to be excessive in the light of the London auditor's report for the assessment year 1963-64, I must accept that the respondent-Income-tax Officer's reasons for believing that the assessee's income had been under-assessed for the aforesaid three years have been disclosed to the petitioner and that no complaint can be made for such non-disclosure.
8. Mr. Banerjee, the learned counsel for the respondents, contended that the petitioner has no right to any relief and the petition is misconceived. It is submitted that the petitioner is not entitled to be informed of the reasons for the belief that the petitioner's income has escaped assessment until it has filed the returns in response to the notice under Section 148. I agree, but in this application what is challenged is the jurisdiction of the Income-tax Officer to issue the impugned notices on the ground that the conditions leading to the exercise of such jurisdiction have not been fulfilled. The principles relating to the examination of jurisdiction by the Income-tax Officer in starting reassessment proceedings have been clearly laid down by several decisions of the Supreme Court both under Section 34(1)(a) of the 1922 Act as well as under the analogous provisions in Section 147(1)(a) of the 1961 Act. It would be enough to mention its decision in S. Narayanappa v. Commissioner of Income-tax, : 63ITR219(SC) where the following principle has been enunciated :
'It is true that two conditions must be satisfied in order to confer jurisdiction on the Income-tax Officer to issue the notice under Section 34 in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year. The first condition is that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to income-tax had been under-assessed. The second condition is that he must have reason to believe that such 'under-assessment' had occurred by reason of either, (i) omission or failure on the part of an assessee to make a return of his income under Section 22, or (ii) omission or failure on the part of the assessee to disclose fully and truly all the material facts necessary for his assessment for that year. Both these conditions are conditions precedent to be satisfied before the Income-tax Officer acquires jurisdiction to issue a notice under the section.'
9. Dr. Pal's contention is that, as there was neither any omission nor any failure on the part of the assessee to disclose fully or truly all the material facts in consequence of which the assessee's income could be said to have been under-assessed for any of the relevant years, the conditions precedent necessary for the assumption of jurisdiction was absent and the impugned notices were bad. He submitted that the question of the allowances of the London management expenses had cropped up again and again in each year of assessment from 1953-54 onwards and discussions had been held between the Income-tax Officer concerned and the petitioner company culminating in a conference held between the Commissioner of Income-tax, Central, and the representative of the petitioner-company where the position had been discussed threadbare. The petitioner had explained again and again that it debited the amount which was allocated to it by the Burmah Oil Co. Ltd., London, as its share of the general management expenses of the London office of the latter company attributable to the services rendered to the petitioner-company. As it had no office or staff of its own in London, it accepted and paid the amount demanded by the Burmah Oil Co. Ltd. In some of these years a certificate of reasonableness from the London auditor was also demanded but the petitioner expressed its inability to procure such certificate within the time asked for and the assessments were completed without such certificate. If the Income-tax Officer was not satisfied with the explanation given by the petitioner, he could have either refused to allow the whole or a part of the claim for London management expenses. Having accepted the claim with full knowledge of the facts and in spite of the non-production of the auditor's certificate demanded at the time of the original assessment, it cannot now be contended that income had escaped assessement due to the failure of the petitioner to disclose truly or fully all the material facts necessary for its assessment. As a matter of fact, the petitioner produced the auditor's certificate relevant to the assessment year 1963-64 and for that year the auditor had certified that 10 per cent. of the total managerial expenses in London would be reasonable in consideration of the services rendered by the Burmah Oil Co., London, to the petitioner. Dr. Pal submitted that at the most the auditor's certificate produced at the time of the assessment for 1963-64 constituted an information on which the respondent-Income-tax Officer could have reopened the assessment under Section 147(1)(b), but he could not do so in respecet of the years concerned in this application, as the prescribed period of four years had already elapsed. It is not the case of the revenue that the petitioner had deliberately suppressed any such report. Even on receipt of the letter dated the 21st October, 1965, from the respondent-Income-tax Officer, the petitioner was willing to produce the relevant certificate if sufficient time was granted. But the respondent refused to grant more than a fortnight and issued the impugned notices on the 25th November, 1968.
10. Mr. Sen, who followed Mr. Banerjee for the respondents, submitted that the scope of enquiry in this application is whether there were any materials for the respondent-Income-tax Officer to come to his belief that the petitioner's income had escaped assessment due to his failure to disclose fully or truly all the material facts. The reasons recorded by the Income-tax Officer for obtaining the necessary sanction of the Commissioner had been disclosed to the court and the question is whether they constitute material on which the Income-tax Officer could have grounded his belief. At this stage the court is only to consider whether the materials considered by the Income-tax Officer were extraneous or superficial to the formation of his belief.
11. If that was the only question involved, I might have come to the conclusion that the absence of the relevant certificates from the London auditors might lead the Income-tax Officer to the belief that excessive allowance had been granted in respect of the London management charges. But, as pointed out by the Supreme Court in the aforesaid case, the Income-tax Officer must have reason to believe that the underassessment was also due to the failure of the assessee to disclose all the material facts. In the light of the correspondence disclosed in the petition, it cannot be said that there was any such failure on the part of the petitioner. All the facts in its possession were placed before the taxing authority. It was for the taxing authority either to accept the claim or to reject it wholly or partly. After having accepted the claim even in spite of the non-production of the relevant auditor's certificates, the department cannot now turn round and say that its income had escaped assessment or been under-assessed due to the failure of the petitioner to disclose those very auditor's reports. As pointed out by Dr. Pal, the assessing, Officer could have very well refused to accept the claim or allow the total amount of such claim. Having allowed the claim he cannot now try to whittle it down on the ground of reasonableness based on the auditor's report for a subsequent year. Though I am satisfied that the assessee has in all possibility obtained a larger allowance than it should have reasonably been allowed in the relevant assessment years concerned in this application, I am of opinion that the department is not entitled to reopen the assessments on the ground that the assessee's income had escaped assessment due to its failure to disclose fully all the material facts. The under-assessment, if any, was due to the laches of the department itself, and not due to any act or omission on the part of the petitioner. This rule must, therefore, be made absolute, and the impugned notices under Section 148 must be quashed and the respondent must be directed in for bear from giving my further effect to the said notices. The ad-interim order, if any, would be vacated. There will be no ordes as to costs.