1987 (5) TMI 72 - AT - Income Tax

Summary

Issues involved:
1. Whether the assessee, a Sovereign State, is a 'person' u/s 2(31) of the Income-tax Act and liable to taxation.
2. Validity of proceedings initiated u/s 139(2)/148 without proper service of notice.
3. Status of the assessee as an Association of Persons (A.O.P).
4. Computation of income and applicability of Rule 10(i) of the Income-tax Rules, 1962.

Summary:

1. Assessee as a 'Person' u/s 2(31):
The Tribunal held that the assessee, M/s. Iraqi Airways, is a department of the Government of Iraq and not a 'person' within the meaning of sec. 2(31) of the Income-tax Act. The income of a sovereign state is immune from taxation in another state unless there is specific legislation to the contrary. Therefore, the income of Iraqi Airways is immune from Indian taxation.

2. Validity of Proceedings u/s 139(2)/148:
The Tribunal found that the notices u/s 148 or 139(2) were served on the Sales Manager or employees of the travel agent representing Iraqi Airways in India. Despite the contention that notices were not served on authorized persons, the Tribunal held that the service was valid as the returns were filed by the Sales Manager, who was authorized to represent the assessee. Thus, the proceedings were not vitiated.

3. Status as an A.O.P:
The Tribunal rejected the status of the assessee as an Association of Persons (A.O.P). It was held that Iraqi Airways is a department of the Government of Iraq and not an independent entity. The income earned by Iraqi Airways is the income of the sovereign state of Iraq.

4. Computation of Income and Rule 10(i):
The Tribunal disagreed with the CIT (Appeals) who directed the computation of income under Rule 10(i) by estimating net income at 7.5% of Indian turnover. The Tribunal held that the income should be computed under Rule 10(ii), which considers the proportion of total world income attributable to Indian operations. The claim for depreciation should be allowed, and the income determined accordingly. The Tribunal also addressed the issue of carrying forward losses, stating that losses should be carried forward if returns are filed within the time specified u/s 139(4).

Conclusion:
The Tribunal allowed the appeals in part, holding that the income of Iraqi Airways is immune from Indian taxation as it is a department of the Government of Iraq. The computation of income should be done under Rule 10(ii) with allowance for depreciation, and losses should be carried forward as per law.