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TMI Blog1987 (5) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... )/148 of the Act were valid in spite of the fact that no notice under these sections was served upon the appellant or any of its alleged members or agent. " 3. " That the Commissioner of Income-tax (Appeals) erred in confirming the status of the appellant as an A.O.P." 4. " That the Commissioner of Income-tax (Appeals) erred in directing the Inspecting Assistant Commissioner of Income-tax (Asst.) to compute the income of the appellant by applying Rule 10(i) of the Income-tax Rules, 1962 and estimating the net income @ 7.5% of its Indian turnover, and in not allowing depreciation carry forward of loss ?" Except for the assessment years 1980-81 and 1981-82 the earlier assessments had been made by initiating the proceedings under section 139(2) read with section 148 of the Income-tax Act. Extensive arguments were advanced by the learned counsel for the assessee and we divide his arguments into three parts. Firstly, he submitted that M/s. Iraqi Airways was not assessable to Indian Income-tax, as it was a Department of the Iraqi Government and the income of a foreign Government could not be taxed here. According to his submission, the Iraqi Government could not be considered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Department of Government ofIraqunder the Ministry of Communications. Later on certificate from the Ministry of Communications of the Government of Iraq was also filed stating that M/s. Iraqi Airways was a Department of Government ofIraq. According to the Income-tax Department, M/s. Iraqi Airways were in the nature a statutory corporation and could not be considered as a Department of Government ofIraq. The assessee drew the attention of the assessing Officer to Article IX of Law No. 7 of 1961. It provides that after augmenting the paid up capital and after subscribing to the reserve fund the net profit of M/s. Iraqi Airways was to be wholly paid to the Treasury of theRepublicofIraq. This was not paid as a dividend but as a direct payment. In view of this stand, the assessee filed NIL returns showing the status asSovereignState. The Income-tax Officer did not accept the claim of the assessee for exemption from Indian Income-tax Act and he treated the assessee as an Association of Persons and proceeded to determine the income under Rule 10. Before the CIT (Appeals) also it was pointed out that the assessee was not registered as a company under Company Law of Iraq and the income was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State. For this he relied on the assessment order passed for the year 1976-77 where certain reasons had been given for not accepting the claim of the assessee. That order had travelled up to the Tribunal and the Tribunal had set aside that order with a direction that fresh assessment should be made after making proper inquiries and ascertainment of fall facts. The CIT (Appeals) has also not gone in detail on this matter but the plea of the assessee was rejected. As extensive arguments were addressed before us on this issue, we propose to consider this matter at some length on the basis of the materials before us. 6. We have before us an affidavit filed by the Ministry of Transport and Communications of theRepublicofIraqstating that Iraqi Airways is a Government organisation under Law No. 7 of 1961 and its capital is owned by the State and the same position continues under Law No. 7 of 1976 and the law No. 116 of 1979. In support of this statement in the affidavit the copies of various laws have been filed before us. As already stated, the basic law was Law No. 7 of 1961, under which Iraqi Airways was to be an administrative establishment to operate on a commercial basis for the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be immune from taxation under the Indian Income-tax Act. Whereas the basic stand of the Department is that Iraqi Airways is an independent undertaking of the Government of Iraq and it should be treated as a statutory corporation, the plea of the assessee has been that it is a part of the Government machinery and not separate from it in any manner. According to them, it is not a statutory corporation or a company registered under the Iraqi laws. The main submission is that the income earned by Iraqi. Airways was ultimately to go to the Government's treasury though the Government had decided that the income would first be used towards the building of a capital and reserves for running the Iraqi Airways. According to the counsel for the assessee, the independence given to the Board of Directors within the framework of law did not mean that it was a statutory corporation. Some sort of organisation was made to run the Iraqi Airways. But the test for holding it to be a part of the Government was that its income was to be the income of the State of Iraq and the budget was to be under the full control of the Government of Iraq. According to the learned counsel for the assessee, the positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question arose whether the Central Government of Pakistan could impose income-tax on the income of thePunjabProvincewhich was owning a factory outside that province. It was held that to attract the operation of section 155 of the Government of India Act, 1935 there should be a specific legislation making the Government of a province expressly liable to income-tax in respect of its trade activities. As there was no such specific law it was held that theProvinceofPunjabwas not liable to income-tax in respect of the profits earned by it or the factory. It was submitted that in the present case there being no specific law to assess the income from the foreign Government, the assessments had not been legally made. 10. Making a submission regarding the immunity from taxation, the learned counsel relied on the decision in the case of Krajina v. Tass Agency [1949] 2 All. ER 274. Tass Agency,Moscow, U.S.S.R. is the central information organ attached to the Soviet of People's Republic of U.S.S.R. A question arose whether Tass Agency was entitled to sovereign immunity in English courts. In that case also the Soviet Ambassador had given a certificate that Tass Agency was a Department of theS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not limited to actions arising out of official governmental transactions but covers also actions arising out of the trading activities. 11. The learned Departmental Representative, on the other hand, submitted that it was not within the jurisdiction of the Tribunal to go into the question of immunity of sovereign under International Law. The question has to be discussed and decided under the provisions of the Income-tax Act and no other law should be taken into consideration for deciding the question of taxability. Apart from this argument, the learned Departmental Representative referred to Law No. 7 of 1961 and pointed out that Iraqi Airways had been organised in a manner in which a public undertaking is organised and it was a corporation formed by a statute. Therefore, it could not be treated differently from a statutory corporation inIndia. It was pointed out that Iraqi Airways had its own juristic personality with rights to own and dispose of immovable property etc. Reliance was placed on the arguments advanced by the CIT (Appeals) while deciding the assessee's case for the assessment year 1976-77. Specific reference was made to article 12 of the Law of 1961 which provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the immunity from Taxation should be the rule when the activities concerned are those normally and traditionally regarded as governmental in character ; but when a foreign State engages in trading operations of a type generally open to private persons, there seems no need to better its competitive position or to shift tax burdens to others through giving it exemption from taxes. 13. Referring to the certificates and affidavits filed on behalf of the assessee, it was contended by the Departmental Representative that they were not conclusive and binding for deciding the issue before the Tribunal. They were self-serving certificates and, therefore, they should not be accepted and acted upon. He submitted that the law itself was rebuttal of the claims made in the certificates as it clearly indicated that Iraqi Airways had any independent personality and separate in existence. Referring to the decision of the Delhi High Court in the case of Aeroflot it was submitted that section 96 of the C.P.C. clearly provided for taking away the immunity by stating that a suit could be filed if certain conditions were fulfilled. Referring to the other case laws it was submitted that the case laws o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , observes :--- " He (meaning a sovereign) must, be granted so called exterritoriality conformably with the principle, per in parem non habet imperium, according to which one sovereign cannot have any power over another sovereign. He must, therefore, in every point be exempt from taxation, rating and every fiscal regulation and likewise, from civil jurisdiction, except when he himself is the plaintiff," Hollandin his Lectures on International Law, at page 201, observed as under : " An Ambassador is exempt from taxation and also from customs dues : by right as to property held in his representative capacity and by courtesy as to property held otherwise. An ambassador is given rights given to his sovereign and it is because the sovereign is exempt from taxation that such exemption is given to the ambassador." In the case of Parlement Belge [1980] 5 P.D. 197, it was held as under : " As a consequence of the absolute independence of every sovereign authority and of the international comity which induces every sovereign state to respect the independence for every other sovereign state, each state declines to exercise by means of any of its Courts, any of its territorial jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c clear legislation to the contrary. Now on the basis of the law under which Iraqi Airways was formed and the manner in which it was organised and administered it is a part of the Iraqi Government and a department of its Ministries. The main test to decide whether the income earned by Iraqi Airways belongs to the Iraqi Government or any other corporation is clinched by the provision under which the income earned by the corporation can be accumulated towards their own capital and reserve and after that it has to be directly paid into the Government treasury. The administration of the Iraqi Airways does not have any discretion not to pay the balance of income in the government treasury and it does not depend on the declaration of a dividend by the Iraqi Airways. In deciding such matters we cannot be guided fully by the law of incorporation, which is there inIndia. We have to be guided by the law of the land where Iraqi Airways came into existence. The interpretation of that law as made by the authorities of that country cannot be treated lightly. Various authorities fromIraqand their ambassadors inIndiahave clearly certified that Iraqi Airways is a Department of the Government of Ira ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with law. 20. The learned counsel for the assessee had made three blocks of these appeals, one pertaining to assessment years 1970-71 to 1973-74 and the other 1974-75 to 1979-80 and third for 1980-81 and 1981-82. It was also mentioned that income of these cases, the proceedings were initiated under section 148 while in others it was under section 139(2). 21. We have already adjudicated the first issue in dispute in favour of the assessee that the assessee is a department of aForeignSovereignStateand as such enjoys immunity from Indian Income-tax. We are also accepting the assessee's other contention in respect of applicability of Rule 10(ii) subject to observation that assessee's claim for depreciation to be allowed. In view of these two findings, the issues pertaining to validity of notices initiating the proceeding or their service became academic because once the assesses has been accepted to be Sovereign and as such to be enjoying immunity from Indian Income-tax, alleged invalidity of the notice or of their service is not going to be of any consequence to either party. More so, when we are also adjudicating that total income be computed as per Rule 10(ii) and depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... catena of decisions which are CIT v. Baxiram Rodmal [1934] 2 ITR 438 (Nag.), CIT v. Dey Bros. [1935] 3 ITR 213 (Rangoon), C.N. Nataraj v. Fifth ITO [1965] 56 ITR 250 (Mys.), CIT v. Coimbatore Pictures (P.) Ltd. [1973] 90 ITR 452 (Mad.), Lakshmibai v. ITO [1972] 86 ITR 804, 814 (Mys.) and S.K. Manekia v. CST 1978 Tax LR 1625 (Bom.), etc. Income-tax Officer in doing the very important work of assessing income-tax, must take the elementary precaution of seeing that the person with whom they are dealing is in fact authorised to represent the assessee and they are not entitled to assume this merely because such person has on occasions signed a notice, possibly under pressure or produced account books for inspection. 23. The learned Departmental Representative, on the other hand, relying on the orders of the two lower authorities, submitted that service has been effected on the authorised person. Moreover, according to him, all the notices were responded by filing of returns for the respective years and there was complete acquiescence by the assessee in the proceedings and hence there is no invalidity of the service. He submitted that in case section 282 is carefully read its preamble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that it is wrong to say that objection was not raised before the learned lower authorities. He read out para. 4 of each assessment order for all the years wherein objection regarding service is projected. According to him, as per section 282, requirements of issuance of a notice are that it should be on a member of Association of Persons or partner or principal officer of the association. There is nothing like authorised person. ' Principal officer ' according to him, is defined in section 2(35). The gentleman on whom the service was effected was not the ' principal officer '. 25. After taking into consideration, the rival submission and going through the facts at length and considering the case laws cited by both the parties, we are unable to accept the contention of the assessee that service was not validly effected and, therefore, the assessments be annulled. First of all, we may briefly state that Iraqi Airways as per admission of the learned counsel of the assessee himself is represented in India by its Sales Manager or Sales Director who is not subjected to Indian Income-tax and who is paid the salary by Embassy of Iraq. It is also submitted by the learned counsel of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we had perused the assessment record for all the years. The same reads as under -------------------------------------------------------------------------------------------------------------------------------------------------- " A.Ys. Notice ----------------------------------------------------------------------------------------------- U/sec. Served Served Date on upon -------------------------------------------------------------------------------------------------------------------------------------------------- 1 2 3 4 -------------------------------------------------------------------------------------------------------------------------------------------------- 1970-71 148/26-3-79See Remarks 24-3-79Column. 1971-72 148/12-3-8010-3-80 1972-73 148/12-3-8010-3-80 1973-74 148/12-3-8010-3-80 1974-75 148/8-11-808-11-80 -------------------------------------------------------------------------------------------------------------------------------------------------- contd... ------------------------------------------------------------------------------------------------------------------------------------------------- Return field Remarks ---------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------------------- 5 6 7 --------------------------------------------------------------------------------------------------------------------------------------------------- 6-12-80-do- The two persons signed the receipt on the notice one of whom is the same who had also signed the notice of 1970-71 and other one also signed the notice u/s. 134(3) of29-11-80with a rubber stamp of Iraqi Airways.28-2-79Same person who signed the power of Attorney. 21-1-80MT. AT Yassin Two persons signed receipt on the (Manager of Iraqi notice one of whom appears to be Airways inIndia). Subhash Jain, Cheif Acctt. for Iraqi Airways who also signed Power of Attorney in front of Sh. Jodh Singh, Adv. on31-5-80and other person appears to be one who signed power attorney and notice in 71-72 to 74-75. 21-1-80MT AT Yassin -do- (Manager of Iraqi Airways inIndia) 21-1-80MT AT Yassin Appears to be voluntary return. Kindly (Manager of Iraqi see assessment order u/s. 143(3) Airways inIndia) dated10-12-1980. 16-1-81Moayed Yassin 139(2) served on the same persons AI NASIRI as in earlier years. (Manager) 14-12-83Jihad Abdul Sahid -do- (Manager inIndia). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the returns for all the years as detailed above, the service of notices in the office of Iraqi Airways sometimes on him and sometimes jointly on him and the employees of the Travel Agent are valid. All notices are addressed to Iraqi Airways and there is nothing wrong in the same. The very fact that the sales manager and Director has signed the return once it should not lie in the mouth of the assessee to say that he was not an authorised person. We also find force in the submission made by the learned Departmental Representative regarding the assessment years 1980-81 and 1981-82 that in any case the returns filed were to be treated as returns under section 139(4) and so the assessments made were valid. The contention of the learned Departmental Representative regarding the effect of section 292-B becomes academic. 30. Coming to the law cited by the learned counsel for the assessee at bar, we find how in the case of Baxiram Rodmal, the dictum given by Their Lordships was : " Income-tax Officers, in doing the very important work of assessing income-tax, must take the elementary precaution of seeing that the person with whom they are dealing is in fact authorised to represent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the sales agent who sit in the same office. On another decision of Mysore High Court in case of C.T. Rajagopal v. State ofMysore[1972] 86 ITR 814. The reliance of the learned Counsel for the assessee is misplaced because in that case there was no notice served on the assessee requiring him to submit the returns and, therefore, proceedings were held to be illegal. It is not so in the instant case. Again, reliance is placed on the case of S.K. Manekia. The reliance on this case is also misplaced because it was the sales director or manager or employee of the same agent who was served with notice. Reliance of learned counsel for the assessee on other case viz. Y. Narayana Chetty v. ITO [1959] 35 ITR 388 (SC) is misplaced due to distinction of facts. There is no dispute about the fact that reassessment cannot be sustained unless there is a valid notice and valid service but it was not so in the instant case. The Calcutta High Court in case CIT v. Kiran Debi Singhee [1967] 65 ITR 501, also does not come to the rescue of the assessee. The Calcutta High Court decision in Bhagwan Devi Saraogi's case could be of some assistance to the assessee had the status of the assessee been confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld business and determined the loss inIndiaafter applying the same ratio to Indian receipts. The assessee had, however, claimed depreciation on aircraft, aircraft accessories and buildings. After referring to figures on which depreciation had been claimed the Inspecting Assistant Commissioner observed that the cost of the aircraft had not been satisfactorily explained and the prescribed particulars were also incomplete. In view of this, he held that the claim for depreciation could not be allowed. The Inspecting Assistant Commissioner further observed that it was not possible to verify from the particulars given, the correctness of the figure of written down value, the details of assets added, sold or discarded, demolished so as to work out the income correctly. He, therefore, determined the income/loss without adjustment of any depreciation whatsoever. In the first few years he found that even without allowing depreciation, there was loss. He, however, observed that this loss could not be carried forward, as the returns showing losses had been filed in response to notice under section 148 after lapse of two years from the end of the assessment year. In the same way, a revised loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising to any non-resident person whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through or from any money lent at interest and brought into India in cash or in kind cannot be definitely ascertained, the amount of such income for the purposes of assessment in income-tax may be calculated :---- (i) at such percentage of the turnover so accruing or arising as the Income-tax Officer may consider to be reasonable, or (ii) on any amount which bears the same proportion to the total profits and gains of the business of such person (such profits and gains being computed in accordance with the provisions of the Act), as the receipts so accruing or arising to the total receipts of the business, or (iii) in such other manner as the Income-tax Officer may deem suitable. " 36. While determining the income of the assessee under Rule 10(i) the CIT (Appeals) referred to section 44B of the Income-tax Act wherein 7.5% of the Indian turnover could be taken as the net income of the foreign shipping company. He adopted the same basis for determining the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable or there was any other specific difficulty in making the world accounts as the basis for determining the income. The learned counsel for the assessee was agreed that in spite of considering the assessee's claim for allowance of depreciation the CIT (Appeals) has changed the basis for determining the income without any justification and has made enhancement where it was not called for. He pointed out that in a case where Iraqi Airways had suffered losses in some years, the CIT (Appeals) had determined some notional figure of profits and thus the tax liability has been fastened to the assessee without any justification. It was further submitted that the determination of the percentage of profit at 7.5 % was without any basis. He pointed out that in the latest Finance Bill a percentage of 5 have been fixed for the purpose of determining the income of the Airlines but that too could not be applicable for the years under consideration. The Departmental Representative submitted that the CIT (Appeals) found that there was practical difficulty in allowing the claim for depreciation as the necessary particulars have not been furnished and the assets which were used inIndiawere not cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit and loss account of the total activity is available Rule 10(ii) should be applied. Only where such overall accounts are not available, the application of Rule 10(i) on the basis of local turnover should be justified. The discretion in the Rule is given to the Income-tax Officer and the exercise of that discretion has to be proper and in judicious manner as held by the Supreme Court in the case of CIT v. Simon Carves Ltd. [1976] 105 ITR 212. Circular No, 7 of 1942 where instructions were given regarding the assessment of shipping companies, the world accounts furnished by the shipping companies had to be the basis for making the determination of income. There are also directions for acting on the certificates issued inUnited Kingdomin respect of British Shipping Companies. In case ofNetherlandsSteam Navigation Co. Ltd. v. CIT [1969] 74 ITR 72, it was held by the Supreme Court that normally the second method was applicable where the necessary data for that are available. This method ordains that the fraction which the total profits bear to the total world receipts is to be applied to the Indian receipts for determining the taxable profits. The income so determined will be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined by the Income-tax Officer without allowing depreciation he had held that it was not to be carried forward. In fact as the proceedings had been initiated under section 148, the assessing Officer had decided to file those proceedings as he found that no income had escaped assessment in those years. We do not find any fault with the order of the assessing Officer where he drops the assessment proceedings under section 148 after having found that in fact there had been no escapement of income as a result of the non-filing of the return by the assessee. However, where a normal assessment is made it would be incumbent on the assessing Officer to determine the losses and carry them forward in accordance with law and he cannot deny it on the basis that the assessee had not filed a return within the time specified under section 139. For this we relied on the decision of the Calcutta High Court in the case of Presidency Medical Centre (P.) Ltd. v. CIT [1977] 108 ITR 838. In this case it was held that if a return is filed within the time specified by sub-section (4) of section 139 of the Income-tax Act, it would be deemed to be in accordance with law and the loss has to be determin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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