TMI Blog1969 (9) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... lotment to the English company of 4,77,000 ordinary shares of pound 1 each in the Indian company and the balance of pound 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the petitioner in respect of the aforesaid loan was allowed as deduction. 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. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Commissioner of Income-tax v. R. R. Ramakrishna Pillai " 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. Dr. Pal next cited the Supreme Court decison in S. Narayanappa's case, and pointed out that the court had laid down the following conditions under which the Income-tax Officer could issue notices for reassessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 in the 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 ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 2(47) of the 1961 Act denotes what constitutes a transfer of a capital asset also for determining capital gains. 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). 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 application under article 226. 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 Nayayanappa'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 cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 cases). 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. 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 omission or failure on the part of the assessee either to file its returns or to disclose the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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