Calcutta High Court
Commissioner Of Income-Tax vs Nippon Yusen Kaisha on 21 December, 1988
Equivalent citations: [1989]180ITR442(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. At the instance of the Commissioner of Income-tax, West Bengal-II, the following question of law has been referred to this court under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1974-75 :
"Whether, oh the facts and in the circumstances of the case, the Tribunal is justified in holding that there was no information in the possession of the Inspecting Assistant Commissioner to form a reasonable belief that income had escaped assessment ?"
2. The short question which calls for determination in this case is whether the Tribunal was justified in holding that there was no information in the possession of the Inspecting Assistant Commissioner to form a reasonable belief that income had escaped assessment.
3. The assessee is a non-resident shipping company. The assessee-company derived income from India and abroad. Originally, the assessment was completed by applying Rule 10(ii) of the Income-tax Rules, 1962, but, subsequently, the assessment was reopened under Section 147(b) of the Act on the ground that in other non-resident shipping companies, the proviso to Section 145 was applied and 1/6th of the freight earnings in India was treated as Indian income and on that basis excess relief was given. The application of the proviso to Section 145(1) was upheld by the Commissioner of Income-tax (Appeals) but the total income was reduced from 1/9th to 1/8th of the gross freight earnings. Therefore, the Assessing Officer (in this case, the Inspecting Assistant Commissioner, performing the duties of an Income-tax Officer) was of the view that the income of the assessee was under assessed. He, consequently, determined the income at 1 /8th of the Indian freight earnings and completed the assessment.
4. On appeal, the Commissioner of Income-tax (Appeals) cancelled the reassessment, agreeing with the view expressed by his counterpart at Madras that the change of basis of assessment did not constitute information and there was, in fact, no information at all but only a fresh opinion on the same facts. He, accordingly, cancelled the reassessment.
5. The matter was taken up in further appeal before the Tribunal by the Department. The Tribunal held that there was no information in the posses-
sion of the assessing Inspecting Assistant Commissioner to form a reasonable belief that income had escaped assessment. It, therefore, upheld the order of the Commissioner of Income-tax (Appeals) cancelling the reassessment made by the Inspecting Assistant Commissioner and dismissed the departmental appeal.
6. It is contended before us on behalf of the Revenue that, in view of the information obtained from the appellate order of the Commissioner of Income-tax (Appeals), the Income-tax Officer reopened the assessment and it must be held that the information regarding the assessment made by applying the proviso to Section 145(1) is information on the basis of which the Income-tax Officer was justified in reopening the assessment.
7. On the other hand, the contention of Dr. D. Pal is that, under the relevant rule, being Rule 10 of the Income-tax Rules, 1962, three methods have been provided for computation of income in such cases. Each of the three methods is permissible and the Income-tax Officer has chosen one of such methods. If he has adopted a particular method, it cannot be said that such method is an erroneous method and, accordingly, on the basis of the appellate order, without there being a direction upon him, he cannot reopen the assessment under Section 147(b) of the Act.
8. Rule 10(i) of the said Rules provides as follows :
"10. Determination of income in the case of non-residents.--In any case in which the Income-tax Officer is of opinion that the actual amount of the income accruing or 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 to 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 bear to the total receipts of the business, or
(iii) in such other manner as the Income-tax Officer may deem suitable."
9. The reasons recorded by the Assessing Officer are as follows :
"Over a period of years prior to 1975-76 assessment, the income of non-resident shipping companies including the assessee was being assessed by the application of Rule 10(ii) of the Income-tax Rules. In the course of the assessment for 1975-76, the Assessing Officer found that, as a result of the assessments framed on the above basis, excess relief was given to the assessee for the earlier years. He, therefore, applied the provision of Section 145(1) of the Act in framing the assessment for 1975-76. He was also of the view that it would be reasonable to hold that 1/6th of the gross earnings should be treated as the income embedded in the earnings. The Commissioner of Income-tax (Appeals) has also upheld the action of the Officer invoking the provisions of Section 145(1) of the Act. Consequently, the income for this year has been under assessed.
I have, therefore, reason to believe that income chargeable to tax for this year has escaped assessment. Start proceedings under Section 147(b) by issuing notice under Section 148 of the Act"
10. Admittedly, the assessments have been made by applying Rule 10(ii) of the said Rules. This Rule has been applied in the original assessment also for determining the income accruing in India for the purpose of income-tax assessment. The Rule itself clearly shows that the actual amount of income accruing or arising to a non-resident cannot be definitely ascertained. The amount of such income for the purpose of assessment to income-tax may be calculated as specified under Clause (i) or (ii) or (iii). Clause (iii) gives wide discretion to the Income-tax Officer in the matter of determination of such income. The application of Rule 10(ii) has been made in respect of determination of income of a non-resident shipping company as a matter of Rule of thumb. From the reasons recorded by the Assessing Officer, it appears, that allegedly excess relief has been granted to the assessee by applying Rule 10(ii) of the Income-tax Rules, 1962, and this was based on the application of the proviso to Section 145(1) in the assessment year 1975-76. The contention is that such application was upheld by the Commissioner of Income-tax (Appeals). It is true that income can be said to have escaped assessment if excessive relief had been allowed. Although the Assessing Officer recorded reasons that, in the light of assessment for 1975-76, excessive relief was given to the assessee, he failed to disclose the extent of such excess relief and in respect of which particular item such excessive relief was granted. The Tribunal, in our view, was justified in holding that, by applying the basis provided in Rule 10(ii) which is a statutory Rule binding on the authority, no one can say that excess relief was granted on that score. It is evident from the recorded reasons that what the Assessing Officer wanted to convey is that he entertained the reason to believe that income had escaped assessment only by applying a different method of computation, viz., the proviso to Section 145(1) in respect of the same set of facts and circumstances which were existing at the time of original assessment.
11. Each of the three methods indicated is permissible and it is for the Assessing Officer to decide which method would be suitable in a particular case. If in the process of following a particular method or in the application of such method, a mistake or error comes to light on the basis of the decision of the Appellate Authority, the Assessing Officer has the jurisdiction to intiate proceedings under Section 147(b) of the Act but that is not the case here. He has not said that, in the application of Rule 10(ii) of the said Rules, there has been a mistake. He wants to change only the basis from Rule 10(ii) to some other method which is not permissible. It is not a mistake in the application of Rule 10(ii), but the mistake is that this method in Rule 10(i) should not have been applied at all. Reference may be made in this connection to the judgment of the Supreme Court in the case of CIT v. Simon Carves Ltd. [1976] 105 ITR 212. In that case, the original assessment of the respondent, a non-resident company carrying on business as construction engineers, for the assessment year 1959-60 was made by the Income-tax Officer and the total income was computed by invoking Rule 33 of the Indian Income-tax Rules, 1922, corresponding to Rule 10 of the Income-tax Rules, 1962. He applied one of the three methods permitted therein and computed the income through or from certain contracts (business connection) in India. Subsequently, the Income-tax Officer reopened the assessment under Section 147(b) of the Income-tax Act, 1961, and applying a different method permissible, determined the income at a higher figure. The Appellate Tribunal held that the Income-tax Officer could not, in reassessment proceedings, depart from the method of computation adopted in the original assessment and directed that the reassessment be made adopting the same method of computation as in the original assessment subject to any adjustments which might be justified. On those facts, the question regarding reopening of the assessment was referred to this court. This court upheld the view taken by the Tribunal. The matter went up to the Supreme Court and the Supreme Court, after quoting Rule 33 of the 1922 Rules, observed as follows (at pp. 218,219) :
"The above Rule makes it clear that, if other conditions mentioned in the Rule are satisfied, it would be open to the Income-tax Officer in computing the income, profits or gains to apply one of the three methods mentioned in the rule. It is the common case of the parties, and that is also the underlying assumption of the question referred to the High Court, that the Income-tax Officer in making the original assessment adopted one method while the Income-tax Officer making reassessment adopted another method contemplated by Rule 33. The question with which we are concerned is whether it would be a case of income escaping assessment if the Income-tax Officer adopts a method of computation which is permissible under the law but which method results in lower tax liability compared to the other method which too is permissible in law. According to learned Additional Solicitor-General, the adoption of a method even though permitted by Rule 33 which results in lower tax liability of the assessee compared to the other method mentioned in the Rule would warrant the conclusion that income has escaped assessment and as such Section 147 of the Act of 1961 would get attracted. After giving the matter our earnest consideration, we find it difficult to accept the above contention. It was open, as already mentioned, to the Income-tax Officer at the time of making the original assessment, to adopt one of the three methods mentioned in Rule 33 for computing the taxable income of the assessee. Discretion was vested by Rule 33 in the Income-tax Officer for the purpose of making his choice of the methods and the same was to be exercised in a proper and judicious manner. There is nothing before us to show that the discretion was not exercised by the said officer in a proper or judicious manner. It is also not suggested that the Income-tax Officer was actuated by some oblique motive. From the mere fact that the method selected by him was such as resulted in lower tax liability to the assessee compared to the liability which would have resulted from the adoption of the other method, it would not follow that the discretion was not exercised in a proper and judicious manner. The taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from an assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that the scales are weighted against the assessee. We are wholly unable to subscribe to the view that unless those authorities exercise the power in a manner most beneficial to the Revenue and consequently most adverse to the assessee, they should be deemed not to have Exercised it in a proper and judicious manner.
The order made by the Income-tax Officer at the time of the original assessment was a legally correct order and was not vitiated by any error. The absence of an error in that order would justify the inference that the present is not a case of income escaping assessment. There is necessarily an element of error in cases of income escaping assessment mentioned in Section 147(b) of the Act of 1961. Such error resulting in income escaping assessment becomes manifest in the light of information coming subsequently into the possession of the Income-tax Officer. Where, as in the present case, the order making the original assessment was a legally correct order and was not vitiated by any error, the case would not be one which would fall within the ambit of Section 147(b) of the Act of 1961, or Section 34(1)(b) of the Act of 1922. We may add that the Income-tax Officer ordering reassessment does not sit as a court of appeal over the Income-tax Officer making the original assessment. Nor is it open to the Income-tax Officer ordering reassessment to substitute his own opinion regarding the method of computing the income for that of the Income-tax Officer who made the original assessment, especially when the method of computation adopted at the time of original assessment was permissible in law. The fact that the adoption of a different method of computation would have resulted in higher yield of tax would not, in such a case, justify the reopening of the assessment."
12. In our view, the principle laid down by the Supreme Court in the aforesaid decision would be equally applicable to the facts and circumstances of the present case.
13. For the reasons aforesaid, the question in this reference is answered in the affirmative and in favour of the assessee. There will be no order as to costs.
14. Leave is given to the assessee to file the vakalatnama within two weeks after the Christmas vacation.
J.N. Hore, J.
15. I agree.