Decided on August 04,1971



Alladi Kuppuswami, J. - (1.)THE respondent is a non-resident sterling company whose business consists in the purchase of tobacco from India and the sale thereof outside, both directly on the respondents' own account and for commission on behalf of others. THE purchases were effected through the British India Corporation Ltd., Guntur, who were the appointed agents of the assessee-company under Section 43 of the Indian Income-tax Act, 1922. THE agents filed returns of income on behalf of the respondent for the assessment years 1959-60 and 1960-61. THE Income-tax Officer, Guntur, examined the balance-sheet and profit and loss account of the assessee for the calendar years 1958 and 1959 and completed the assessment under Section 23(3) of the Indian Income-tax Act, 1922. THE gross profit on the sale of Indian tobacco including commission was shown in the balance-sheet and profit and loss account of the company for the year 1958 at 11,108. As against this, the Income-tax Officer had to allow the assessee a proportionate part of the overhead expenses. THE total overhead expenses of the company were 19,953. As the company was carrying oil business not only in India but in other places, the proportionate overhead expenses for its business in India had to be worked out. THE total sales of tobacco were of the value of 5,34,031 and the sales of Indian tobacco were for 4,48,590. Hence the overhead expenses were worked out to be As the profit was 11,108, the loss came to 5,652 (16,760--11,108). One-half of this loss, namely, 2,826 or Rs. 37,680, was taken to be adjusted loss being the percentage attributable to the purchasing operations in India. THE same basis was adopted for the assessment year 1960-61 and after setting off the net income against the previous loss, the total loss was found to be Rs. 96,482. THE assessments for the two years were made accordingly.
(2.)SUBSEQUENTLY, in the course of the assessment proceedings for 1962-63, the Income-tax Officer seems to have noticed that a mistake had been committed in the computation of overhead expenses. The return of the assessee for that year disclosed that the overhead expenses were attributable to the entire business of the company, including its business as commission agents and not merely for the business of purchase and sale of tobacco. The Income-tax Officer, therefore, realised that he ought to have first arrived at the proportionate overhead expenses in relation to the total profits, by taking the proportion which the profits bore to the total of profits and commission and then worked out the proportionate overhead expenses for the profits arising out of the Indian sales. The accounts for the year 1959-60 showed the amount of commission as 8,569 and profits as 15,410 (omitting shillings and pence). Hence, the overhead expenses attributable to profits would be The proportionate overhead expenses for Indian profits would, therefore, be which would be equal to 10,770. Deducting this amount from the gross profit it would leave a profit of 338 and the adjusted profits would be 160 or Rs. 2,253 and this had to be substituted in the place of loss of Rs. 37,680 arrived at in the original order. Similarly, computing the overhead expenses in the same manner for 1960-61 would result in sub-stituting a profit of Rs. 75,560 instead of loss and the assessment for the year 1960-61 had also to be varied accordingly. The Income-tax Officer, therefore, came to the conclusion that the income of the assessee had escaped assessment for the two years. Therefore, he issued notices to the statutory agents under Section 148 of the Income-tax Act, 1961, on January 18, 1964. The agents contested the validity of those notices and contended that in view of the provisions of Section 149(3) of the Act no notice of reassessment could be served on the agent of a non-resident assessee after the expiry of two years from the end of the relevant assessment year. As this was a valid objection the Income-tax Officer could not proceed further in pursuance of those notices.
The Income-tax Officer thereupon issued notice under Section 148 for the two years direct to the assessee to their London address on February 19, 1964. The assessee-company filed returns on August 19, 1964, for both the years, but under protest contending that the two notices, one on the representative and the other on the person cannot be made. The Income-tax Officer overruled these objections and completed the reassessment on the non-resident assessee direct revising the computation on the lines already referred to above.

The assessee preferred appeals to the Appellate Assistant Commissioner. It was contended before him, firstly, that as the original assessment had been completed on the agents, the reassessment could cot be made directly on the assessee. It was also contended that as all the necessary material, including the commission earned, had been furnished to the Income-tax Officer at the time of the original assessment and there was no fresh information in consequence of which the Income-tax Officer had reason to believe that the income had escaped assessment he could not reopen the assessment under Section 147(b) of the Income-tax Act. It may be noticed that this objection was not raised before the Income-tax Officer by the assessee and, therefore, he had no occasion to deal with it. The Appellate Assistant Commissioner rejected both the contentions. As the revised computation was not seriously challenged on the merits and had in fact been accepted by the assessee in the subsequent years he confirmed the order of the Income-tax Officer and dismissed the appeals.

(3.)THE assessee appealed to the Tribunal and the same contentions were urged before the Tribunal. THE Tribunal was of the view that the basis of the reassessment proceedings was only a change of opinion on the part of the Income-tax Officer and he was not entitled to make a reassessment merely because he changed his opinion. THEy were also of the view that as the assessment was originally made on the agent he cannot again adopt the second method of direct assessment on the assessee even if it be by way of reassessment under Section 147(b) of the Income-tax Act. In view of the above conclusion the Tribunal set aside the assessment of the assessee. THE Tribunal was of the view that two questions of law arose out of its order and, therefore, referred the following two questions of law for a decision of the High Court, namely :
" (1) Whether the Tribunal was right in holding that the reassessments being only consequent on a change as to the method of computation of the profits the initiation of proceedings under Section 148 for each of the assessment years 1959-60 and 1960-61 was justified ? and

(2) Whether the Tribunal was right in law in holding that the original assessment for each of the years having been made on the agents, the reassessment proceedings could not be initiated against the assessee direct ?"

Question No. 1:

Under Section 147(b) of the Income-tax Act, 1961, under which the reassessment is sought to be made, two conditions have to be satisfied:

(a) the Income-tax Officer must have information in his possession ; and

(b) in consequence of that information he must have reason to believe that the income chargeable to tax had escaped assessment for any assessment year.


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