TMI Blog1984 (12) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... States of America and having its branch office in New Delhi. The petitioner is a wholly owned subsidiary of the Coca Cola company which is also incorporated in the USA (referred to as " the home office "). The Indian branch of the petitioner company has been declared as a company under section 2(17)(iv) of the Income-tax Act, 1961, by the Central Board of Direct Taxes and is being assessed as a non-resident company in India since its establishment in 1958. The petitioner/assessee being non-resident, its assessment under the Indian Income-tax Act is restricted to its activities in India. The petitioner manufactures coca cola concentrate and supplies it to the bottler. The ingredients of this concentrate is imported by the assessee from its London office. Since the company's activities are spread over various parts of the world, its affairs are managed by the head office at New York as well as the area office at Beirut. For administrative convenience, the whole area of the operation of the petitioner has been divided into four zones and fourteen areas. The home office, zone office and area office render common service to the branches under them. Thus, for the import of ingredients ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dollar liability, there is decrease in liability in terms of Indian rupees at the end of the year, the outstanding liabilities of the Indian branch in terms of Indian rupees so saved was credited to the profit and loss account and was treated and offered for taxation as profit on exchange. Similar is the position on the actual purchase by remission and the excess or decrease being credited and debited to the profit and loss account and offered for assessment. The Indian branch followed the same system of accounting in regard to the payments to be received by it in dollars from home office for the supplies made by it to the home office or for products exported by it from abroad. This method of accounting was being followed right up to 1959-60 assessment year. The Income-tax Officer accepted this system. He specifically accepted as valid pro rated home office expenses and pro rated service charges for the year and only disallowed a small portion of 5% and 3%, respectively, from the above-said two expenses. This position uniformly continued right up to the assessment years from 1966-67 to 1973-74. In 1967-68, devaluation of the rupee vis-a-vis dollar took place in June, 1966. Beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the year. The Commissioner filed an appeal before the Tribunal but it was dismissed as per order dated February 18, 1974. It held that though the head office and the branch are not two separate entities, but still, in order to work out the profits, payments made to the head office for services and other expenses had to be deducted. The reasoning of the Tribunal was that the branch would have to pay to the Reserve Bank excess amount of rupees to purchase the same amount of dollars on account of devaluation and the increase was in respect of the trading liability of the Indian business whose profits are charged to income-tax and that this loss was real and, therefore, allowed by the Appellate Assistant Commissioner and the Tribunal affirmed the order of the Appellate Assistant Commissioner deducting the sum of Rs. 13,38,850 from the assessment year 1967-68. The Commissioner of Income-tax thereafter filed a reference under section 256(1) of the Income-tax Act for referring the question whether the Tribunal had rightly upheld the deduction of loss on account of Rs. 13,38,850 to the High Court but the same was declined. The Commissioner thereafter made an application under section 256 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of account maintained in Indian currency with every change in the rates of exchange pertaining to its liabilities and assets in foreign currency. It was stated that while adjustments to the amounts already debited/credited as a receipt or expenditure on mercantile basis at the time of actual clearance of the accounts are understandable, the peculiar method of accounting followed by the assessee resulted in working out artificial profits and losses. That once the revenue account is so debited or credited on accrual basis, subsequent adjustments thereto can be made only when the income or expenditure accounted for on accrual basis is actually received or paid. Thus profit and loss worked out by the assessee on account of changes in receipts or payments during the year, shall have to be excluded from the computation of assessable income or losses. Another objection was that the remittances made by the assessee are subject to strict control by the Govt. Rules and Regulations in that behalf. While in actual practice, the assessee is entitled only to such remittances which are approved by the Government and as such in the computation of assessable income, only such remittances wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice expenses ceiling in terms of the letter could only be up to Rs. 58 lakhs. It will be seen that the main reason for reassessment is that once the debit and credit items have been retranslated in rupees at one point of time during the course of the year, they should not be retranslated at the end of the year, but only at the time when actual remission of dollars is done. What is suggested is that liability should be allowed to continue to be shown at the figure when goods/ services were received. But, according to the petitioner, this ignores that profit and loss cannot be worked out unless the accounts are worked out at the end of year because it is only profits of the year (after adjusting all liabilities) that can be offered for taxation. Further, that even if statements of accounts were exchanged monthly between the petitioner and its home office, it could not make any difference because the liability could only be worked out in respect of share of expenses for the whole year, and that necessarily requires retranslation in terms of dollars at the end of the year. A perusal of the reasons given by the Income-tax Officer for reopening the assessment would show that it is rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 73-74, it had thus offered for tax profit on exchange to the tune of Rs. 13,37,381.55 and claimed deduction on account of loss on exchange to the extent of Rs. 43,35,097.95. The Income-tax Officer had taxed the amounts of the profit on exchange, but had, however, refused deduction of loss on exchange. This assessment for 1967-68 by the Income-tax Officer was not accepted and the assessee went up in appeal and deduction on loss on exchange was allowed by the Appellate Assistant Commissioner. The Revenue took up the matter before Tribunal and the High Court, but failed. For the subsequent years, the Income-tax Officer continued to allow this loss on exchange apparently because for the earlier years it had been allowed. It is thus clear that the Income-tax Officer was fully aware of the particular system of accounting followed by the petitioner. This accounting procedure shows that profit on exchange and loss on exchange was shown by the petitioner-assessee year after year in income-tax returns. From the record, it is quite clear that at no point of time, the fact that the loss on exchange was being claimed on account of retranslation of the outstanding liability in dollars at the end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars and was an important part of 1967-68 assessment order and subsequent appellate proceedings cannot be denied. In this background, it is not permissible now for the Income-tax Officer to invoke the provisions of section 148 read with section 147(a) to order reassessment on the items of expenses on account of loss on the fluctuation in the rate of exchange. I am repeating that I am not saying anything as to what view is to be taken on this aspect for the subsequent years of assessment. I am saying so because we were given to understand by the counsel for the Revenue, Mr. Wazir Singh, that for the subsequent year 1974-75, the Income-tax Officer had disallowed this loss on exchange fluctuation and that the assessee had filed appeals which were pending. That is why I do not wish to say anything on the merits of this particular item either way, that is whether the view taken earlier is the correct one or the contrary, which is now being urged, is the sounder one. I do not wish to say anything on the merits because I do not wish to say about matters pending in appeal. I may notice that the counsel for the petitioner, though conceding that there may not be estoppel or res judicata in in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excesses have thus escaped assessment on account of over-deduction of head office expenses and service charges. I shall be dealing with the second aspect little later in the judgment and indicating that, in my view, these extraordinary proceedings are not a proper forum to challenge this part of the notice. The result will be that the notice issued under section 148 will be deemed to have been set aside only in so far as it seeks to reopen the deduction allowed on account of loss on exchange is concerned. The result will be that there will be no restraint on the Income-tax Officer in these proceedings on this aspect of the notice issued under section 148 of the Act. Of course, it will be open to the assessee to raise any objections that he is advised before the income-tax authorities, as permitted by law. I may also note that for the year 1972-73, the reasons given and the claim of escapement of the income are based on the ground of ceiling limit having been crossed by the assessee. In that view, there would be no reason even to partly quash so far as the notice for reassessment for the year 1972-73 is concerned. Of course, in so far as the years 1971-72 and 1973-74 are concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is certainly open to the Income-tax Officer to examine whether expenses on these two counts have exceeded the ceiling permitted by the Reserve Bank of India and as to what is its effect. If in pursuance of this examination, the expenses already allowed have exceeded, and in law that is not permissible in the opinion of the Income-tax Officer, it will no doubt be open to the Income-tax Officer to scale down these expenses on these two heads from the amount that has already been allowed. But then, in that case, the decision will not be on the merits of allowance of the expenses in general, but on a totally different aspect and only on the sole ground of a legal bar having been placed in terms of the letters dated May 4, 1973, and November 6, 1974. have mentioned this caution and limitation because by permitting reopening to be done in terms of the letters of May 4, 1973, and November 6, 1974, am quite clear that this is no permission to broaden in an unlimited manner the enquiry so as to embrace it on merits on other grounds. Now, I shall deal with that part of the reason for reopening the assessment given under section 148, namely, that the income has escaped on account of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all ceiling of 80% of export earnings applicable to the remittances as mentioned in the Ministry's letter dated May 4, 1973. The reason, therefore, for reopening the assessment is stated to be that as the deductions have been claimed on these two counts, namely, home office expenses and service charges in excess of the ceiling limits, the said excess has thus escaped assessment. Mr. Desai, counsel for the petitioner, however, argued that the assessments for the years 1971-72 and 1972-73 were completed before May 4, 1973, and the petitioner cannot be faulted to produce a letter which was not even in existence and the conclusion that the assessee has failed to disclose all material facts necessary for the assessment of income cannot be reasonably arrived at. The argument of the counsel for the Revenue, however, is that even earlier to these letters, there was a ceiling placed on the remittances which could be made and it was, therefore, the duty of the assessee to have brought to the notice of the Revenue the actual fact that an application seeking permission of the Govt. of India to remit the amount abroad was pending decision. It was argued that had this fact been brought to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in excess of that would involve contravention of a law like the Foreign Exchange Regulation Act making such excess an impermissible deduction. It is argued that every expense is not deductible under the Income-tax Act. An expenditure is not deductible unless it is a commercial loss in trade and penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business in a manner contrary to law and he renders himself liable to pay penalty, this cannot be said to be business expenditure and cannot be claimed as deductible expenditure as infraction of law is not a normal incident of business: Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350. The argument is that if under the Reserve Bank direction, no amount can be remitted on account of expense of these two items like home office and service charges than is permitted under letters May 4, 1973 and November 6, 1974, any expense in excess of this ceiling is an unauthorised expense in law and cannot be claimed as appropriate deductions while calculating the profit and loss account of the assessee. Mr. Desai wanted to urge that the ceiling by the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer with power to reopen the assessment did exist; it is not within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax (See Kantamani's case [1967] 63 ITR 638 (SC)). I am not saying nor am I called upon to determine finally whether, in the circumstances of the case, a notice under section 147(a) was issued on sufficient material. It is open to the assessee to satisfy the authorities concerned that the notice was not validly issued and, therefore, no reassessment should be done. But that must be the decision of the income-tax authorities and not of this court in these proceedings. It is also to be remembered that it is open to the income-tax authorities to decide whether the notice under section 148 was valid or invalid. I may also note that any order passed in pursuance of the notice issued under section 148 can also be appealed against and a further appeal and reference under the Act (are available); a perfectly good alternative remedy is thus available under the statute where all these questions can be examined in deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to the assessment year 1970-71. Return of income was filed on June 30, 1970. Subsequently, a revised return of income was filed on account of the fact that the assessee deducted a sum of Rs. 90,760 on account of gratuity in the revised return of income. The petitioner had also claimed as usual in the past expenses on account of home office expenses and area office expenses as in the previous years. The same were allowed subject to a disallowance in respect of these expenses to the extent of 5% and 3% respectively. The income-tax assessment order was made on March 21, 1972. On March 23, 1974, the Income-tax Officer issued a notice under section 147 of the Act on the ground that some income has escaped assessment. The reasons for the plea that the income has escaped assessment have also been supplied. In the reasons, it is stated that deduction on account of provision for gratuity payable amounting to Rs. 90,760 has been allowed as deduction but as the amount has not been paid to the employees nor has it become payable during the previous year, the income chargeable to tax has escaped assessment. This was the reason for starting proceedings under section 147(a) and issuing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the previous year and unless it was out of an approved gratuity fund. As the order was not acceptable, challenge has been made by the Civil Writ Petition No. 377 of 1979. In this writ petition, apart from the common challenge to the disallowance of the home and area office expenses as in the connected writ petition, an additional point for reopening of the deduction given on account of gratuity has been raised. In the reply filed, an objection is, however, taken to the maintainability of the petition by stating that the petitioner has already filed an appeal before the Commissioner of Income-tax (Appeals). The said appeal is stated to have been held against the reopening of the assessment as well as the order passed after reassessment on March 8, 1979. It would be seen that these above two writ petitions were filed in 1979. The notice under section 148 Was Issued on March 25, 1974. Apparently, the petitioner co-operated with the department in pursuance of the notice though it raised objections to the reopening but it did supply the information which was being asked for. It was only when a notice under section 142(1) was issued on February 3, 1979, that the petitioner filed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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