1970 (7) TMI 19 - HC - Income Tax

Reassessment - Petitioner (a company incorporated under the U. K. Companies Act and has its principal place of business in India) claimed deduction of certain expenses as administrative charges incurred by the Burma Oil Company Ltd. of London as the London management fee payable by the petitioner and debited in its account - validity of reassessment proceedings initiated under section 147

Issues Involved:

1. Deduction of administrative charges (London management fee)
2. Reassessment of income under Section 147 of the Income-tax Act, 1961
3. Jurisdiction of the Income-tax Officer to issue reassessment notices
4. Disclosure of material facts by the assessee
5. Validity of reassessment notices under Section 148 of the Income-tax Act

Issue-wise Detailed Analysis:

1. Deduction of Administrative Charges (London Management Fee):

The petitioner, a company incorporated under the U.K. Companies Act, claimed deductions for administrative charges paid to the Burma Oil Company Ltd. of London. These charges were for management and secretarial work carried out on behalf of the petitioner. The Income-tax Officer repeatedly queried the basis and reasonableness of these charges over several assessment years (1951-52 to 1959-60). The petitioner explained that the charges represented a reasonable allocation of the head office expenses attributable to the work done for the petitioner. Despite some initial acceptance by the taxing authorities, subsequent assessments questioned the reasonableness of these charges, particularly when a certificate from London auditors indicated that a reasonable charge was about 10% of the total administrative expenses, whereas the petitioner had claimed far in excess of this percentage.

2. Reassessment of Income under Section 147 of the Income-tax Act, 1961:

The Income-tax Officer issued notices under Section 148 for reassessment of the petitioner's income for the years 1957-58, 1958-59, and 1959-60. The basis for these notices was the belief that the petitioner's income had escaped assessment due to excessive claims for London management fees, which were not supported by the necessary auditor's certificates. The officer's belief was grounded in the auditor's report for the year 1963-64, which suggested that the management fee should be around 10% of the total administrative expenses.

3. Jurisdiction of the Income-tax Officer to Issue Reassessment Notices:

The court examined whether the Income-tax Officer had the jurisdiction to issue the reassessment notices under Section 148. The key conditions for such jurisdiction include having reason to believe that income had been under-assessed and that such under-assessment was due to the assessee's failure to disclose fully and truly all material facts necessary for the assessment.

4. Disclosure of Material Facts by the Assessee:

The petitioner contended that it had fully disclosed all material facts regarding the London management charges during the original assessments. The court noted that extensive correspondence and discussions had taken place between the petitioner and the taxing authorities, and the petitioner had explained the basis for the charges multiple times. The court found that the petitioner had not failed to disclose any material facts and that the taxing authorities had accepted the claims with full knowledge of the facts.

5. Validity of Reassessment Notices under Section 148 of the Income-tax Act:

The court held that the reassessment notices were invalid because the conditions precedent for issuing such notices were not satisfied. The court emphasized that 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. The court quashed the impugned notices under Section 148 and directed the respondent to forbear from giving any further effect to the said notices.

Conclusion:

The court concluded that the reassessment notices issued under Section 148 were invalid as the petitioner had fully disclosed all material facts during the original assessments. The under-assessment, if any, was due to the department's own negligence. The rule was made absolute, and the impugned notices were quashed. There was no order as to costs.

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