SHELAT,C.J. - (1.) THIS is a petition for quashing and setting aside a notice under S. 148 r/w S. 147(b) of the IT Act, 1961, dt. 18th July, 1964, in respect of the asst. year 1960 61, and for restraining the respondent ITO from taking any further proceedings thereunder. The petition also challenged another notice of the same date in respect of the asst. year 1961 62. But when the petition came up for admission before us, we issued a rule with regard only to the notice in respect of the asst. year 1960 61, and, therefore, we are no more concerned with the notice relating to the asst. year 1961 62.
(2.) THE petitioner is a company registered under the Indian Companies Act, 1956, its object being, inter alia, the promotion and protection of the interests of its members who deal in cotton and other allied commodities, the maintenance of uniformity in the said trade and the regulating and controlling of transactions in cotton and other commodities. The petitioner company was incorporated on 29th Oct., 1957. The first year in which it became assessable to income tax was the asst. year 1959 60, of which the accounting period was from 29th Oct., 1957, to 31st Dec., 1958. The petitioner company derived income from (1) subscriptions from members, (2) lagas, (3) powernama lavajam, transfer fees and penalties from members, (4) commission from banks for fixed deposits and interest on fixed deposits and (5) licence fees for cabins and charges for electricity consumed by those using the said cabins. The ITO held that income derived from subscriptions and lagas totalling Rs. 38,906 was not taxable on the ground of mutuality, relying upon a decision of the Bombay High Court in the case of Surat District Cotton Dealers' Association (1959) 35 ITR 121 (Bom), and assessed the petitioner company to a total loss of Rs. 30,072, presumably treating the activities of the petitioner company as business and also treating the receipts excluding the exempted receipts as falling under S. 10 of the 1922 Act. For the asst. yr. 1960 61, of which the year of account was calendar year 1959, the ITO again held that receipts by way of subscription and lagas amounting to Rs. 37,989 were not taxable on the ground of mutuality and assessed the petitioner company to a total loss of Rs. 19,378, again treating the receipts excluding the exempted receipts as receipts from business activities under S. 10. The auditor's statement of account furnished by the petitioner company to the ITO showed net profits of Rs. 18,611, and the membership fee and lagas receipts aggregating to Rs. 37,989, being exempted receipts, assessment was made to a loss of Rs. 19,378. During the assessment for the asst. year 1961 62, of which the year of account was the calendar year 1960, the ITO enquired of the petitioner company why certain receipts of income should not be considered as falling under S. 12 and why the expenses incurred by the association should not be bifurcated between expenses incurred in relation to the exempted receipts and expenses incurred in relation to non exempted income as well as in regard to the activities of the petitioner company falling respectively under S. 10 and S. 12. The petitioner company in reply raised objections to such a course being adopted by the ITO and gave an Explanation as regards the work done by each member of its staff relating to exempted and non exempted income. According to the petitioner company it was shown at that time that one clerk attended to the work in regard to receipts of exempted income for two hours a day. The ITO, after considering the Explanation, held that Rs. 26,766, being the amount of subscription and lagas, were exempted receipts and that Rs. 45,874, being licence fees for the cabins, electric charges, interest on fixed deposits, etc., were income from other sources falling under S. 12. Regarding expenses, he did not allow all the expenses as was done in the earlier years but allowed Rs. 22,231 as against the income derived from cabin licence fees and Rs. 1,132, that is, five per cent of the total income from interest, commission, powernama lavajam and other sundry receipts as expenses incurred for earning those items of income which, according to him, fell under S. 12. The ITO rejected the contention that all the expenses shown by the petitioner company constituted integrated expenditure incurred in carrying out integrated activities of the petitioner company or that there could be no allocation or bifurcation thereof attributable to activities falling under S. 10 and S. 12. He also rejected the contention urged by the petitioner company that all its activities were business activities falling under S. 10. The ITO assessed the petitioner company to a total income of Rs. 22,511 as against its claim for assessing it at a loss of Rs. 22,143. The petitioner company thereupon filed an appeal before the AAC. In his order dt. 22nd April, 1964, the AAC analysed the receipts as follows : He then classified these receipts under three heads : (A) exempted receipts, Rs. 26,766 item I above ; (B) receipts taxable under S. 10(6), i.e., items II and III above, Rs. 25,658 ; and (C) receipts falling under S. 12, items IV and V above, Rs. 20,217. The AAC thus treated income from cabin licence fees and powernama lavajam as income falling under the head of business. As regards expenses, he considered the figure of five per cent as a reasonable one as deductible expenses in respect of receipts falling under the head of "other sources" under S. 12 allowed as aforesaid by the ITO. He also held that the entire balance of expenses was not allowable as against receipts falling under head (B) above and further held that the expenses should be allocated between exempted and non exempted receipts. Pursuant to the order of the AAC, the ITO passed a consequential order and assessed the petitioner company to a total income of Rs. 14,124 instead of the total income of Rs. 22,511 as done by him. Aggrieved by the said order, the petitioner company filed an appeal before the Tribunal. That appeal is still pending. No such appeal however was filed by the Department against the order of the AAC. For the asst. year 1962 63, the relevant year of account of which was 1961, the petitioner company filed a return showing a loss of Rs. 27,741 and in which it claimed Rs. 44,131 as exempted receipts. The ITO, however, treated the receipts from cabin licence fees and electricity charges as income from other sources falling under S. 12, though the AAC had treated those receipts for the asst. year 1961 62, as income from business under S. 10. This he did relying upon a report of his ward inspector dt. 8th July, 1964, wherein that inspector had given details regarding the various categories of the cabins, their respective licence fees, the rent payable by the petitioner company and electricity and other charges collected by the petitioner company. The ITO allowed a limited amount of expenses as against income from cabin licence fees and electricity charges and allowed five per cent of the taxable items of income in respect of other sources and assessed the petitioner company to a total income of Rs. 28,244. It appears from the order passed by him that out of the total receipts of Rs. 89,853 he treated Rs. 44,131 as exempted income. He also treated a sum of Rs. 3,332 as income derived from business and held that the rest, that is, Rs. 42,390, was the amount of cabin fees and electricity charges, though the AAC had treated for the earlier year this income as income under the head of business under S. 10(6) of the 1922 Act. The reason given by him for this departure from the order of the AAC for the asst. year 1961 62 was that the said report indicated that the cabins in respect of which the petitioner company was collecting licence fees were temporary structures erected within the rented building near about the ring and that the petitioner company was actually charging rent which it euphemistically called licence fees . Rs. I. Subscriptions, lagas, etc. 26,766 II. Cabin licence fees, and electric charges 23,223 III. Powernama lavajam and power nama transfer fees 2,435 IV. Interest on commission and fixed deposits, and 19,900 V. Miscellaneous receipts penalty and defaulter member's account 317 presumably to avoid a claim of tenancy rights by the members in respect of those cabins. He observed that the entire building was rented out by the petitioner company at a rent of Rs. 16,452 and that what the petitioner company was doing was to sublet part of the said premises to its members. Similarly, the electricity charges collected from members formed part of the rent collected from the members and therefore treated both these items as falling under the head "other sources" under S. 56 of the Act of 1961. As in the case of earlier year, the ITO allocated expenses towards exempted receipts and non exempted receipts relying upon the fact that these expenses were incurred by the petitioner company for earning both exempted as well as non exempted income. On the basis of the report of his inspector, he also came to the conclusion that the said clerk, Kalyanji Haribhai Shah, attended to the work relating to cabin licence fees, lagas, subscriptions, etc., for which he was paid an annual salary of Rs. 2,160 during the calendar year 1961. He further found that the said clerk was working two hours daily in regard to non taxable items of income and as his daily working hours were eight hours a day, one fourth of his said salary, i.e., Rs. 540, would not be deductible expenses as they related to non taxable items. Accordingly he assessed as aforesaid the petitioner company at the total assessable income of Rs. 28,244.
(3.) ON 18th July, 1964, the ITO issued the notice under S. 148 r/w S. 147(b) for the asst. year 1960 61, on the ground that excessive loss was computed in the assessments for the assessment year 1960 61. In the aforesaid notice it was stated that expenses relating to exempted items of income were wrongly not disallowed and the attention of the petitioner company was drawn to the said report dt. 8th July, 1964. It is this notice the validity of which has been challenged in this petition.;