1998 (3) TMI 7 - SC - Income Tax

Challenge to notices issued under section 148 - Foreign Enterprise - two letters were wholly irrelevant and could not be treated as an information to the Income-tax Officer to initiate reassessment proceeding - held that there was inherent lack of jurisdiction in the Income-tax Officer to issue the notices u/s 148 on the basis of any income of the appellant escaping assessment either under clause (a) or clause (b) of section 147 of the Act. All the notices u/s 148 of the Act are quashed.

Issues Involved:
1. Validity of notices issued under section 148 of the Income-tax Act, 1961.
2. Disallowance of pro-rated home office expenses and service charges.
3. Reassessment proceedings under section 147(a) of the Act.
4. Application of the Foreign Exchange Regulation Act, 1947 and 1973.

Detailed Analysis:

1. Validity of Notices Issued under Section 148 of the Income-tax Act, 1961:

The appeals challenged the Delhi High Court's dismissal of writ petitions against notices issued under section 148 of the Income-tax Act for various assessment years. The appellant, a wholly-owned subsidiary of the Coca-Cola Company, contended that these notices were invalid. The High Court had quashed the notices for the assessment years 1967-68 to 1969-70 and 1971-72 to 1973-74 based on the first ground of wrongful deduction of foreign exchange loss. However, the High Court dismissed the writ petitions for these years, leading to the present appeals.

2. Disallowance of Pro-rated Home Office Expenses and Service Charges:

The appellant's Indian branch had been following a system of pro-rating home office expenses and service charges, which was accepted by the Income-tax Officer for the assessment years 1959-60 to 1966-67. For subsequent years, the Income-tax Officer disallowed a percentage of these expenses, leading to appeals by the appellant. The High Court allowed the Income-tax Officer to examine whether the expenses exceeded the ceiling limits set by the Reserve Bank of India, but this decision was contested by the appellant.

3. Reassessment Proceedings under Section 147(a) of the Act:

The Income-tax Officer issued notices under section 148 for reopening assessments for the years 1971-72 to 1973-74, citing the appellant's failure to disclose all material facts, leading to income escaping assessment. The High Court found that the reassessment on the first ground was invalid as it sought to reopen concluded assessments. However, it allowed reassessment on the second ground related to excess deductions of home office expenses and service charges.

4. Application of the Foreign Exchange Regulation Act, 1947 and 1973:

The reassessment was also based on two letters from the Department of Economic Affairs, which set ceilings on remittances for home office expenses and service charges. The High Court opined that the Income-tax Officer could examine if the expenses exceeded these limits. However, the Supreme Court found that these letters, issued under the Foreign Exchange Regulation Act, were irrelevant for initiating reassessment under the Income-tax Act. The two Acts operate in different fields, and any contravention of the Foreign Exchange Regulation Act would entail action under that Act, not under the Income-tax Act.

Conclusion:

The Supreme Court quashed all notices issued under section 148 of the Income-tax Act, finding an inherent lack of jurisdiction in the Income-tax Officer to issue these notices based on the grounds provided. The impugned judgment of the Delhi High Court was set aside, and the appeals were allowed with costs.

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