Commissioner of Income Tax vs Pierce Leslie and Co. Ltd.

Ramanujam, J.—The revenue seeks a direction in this reference petition to the Tribunal to refer the following two questions for the opinion of this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the allowance of 5 per cent of the head office expenses in the original assessments made for the years 1972-73 and 1973-74 was proper especially when there was no trading activity carried on by the assessee ?

Whether the Tribunal was right in law in cancelling the reassessments made u/s 147(b) for the assessment years 1972-73 and 1973-74 as invalid in law ?

The assessee is a company having a registered office in UK and branches in India. For the assessment years 1972-73 and 1973-74, in the original assessments, the ITO allowed 5 per cent of the head office expenditure incurred in London as expenditure relatable to the income earned in India. Though in the earlier years, the assessee had claimed 10 per cent of the head office expenditure as deduction which was allowed for the years in consideration, the assessee claimed only 5 per cent and the same was allowed originally by the ITO. Subsequent to the completion of the assessments in these two assessment years, the ITO, based on the audit objection that the allowance of 5 per cent head office expenditure was not correct because there was practically no trading activity in India, invoking his power u/s 147(b) of the income tax Act, 1961 (''the Act'') initiated reassessment proceedings and ultimately in his reassessment order withdrew the allowance of Rs. 20,727 in respect of the assessment year 1972-73 and Rs. 23,139 for the assessment year 1973-74. Against the said reassessments for the two assessment years 1972-73 and 1973-74, the assessee preferred appeals to the Commissioner (Appeals). The Commissioner (Appeals) found that the assessee''s main activity was only in India and derived income from investments in London, that the head office in London has to supervise, correspond and otherwise control the activities of the Indian branches and as such 5 per cent of the total expenditure allowed as deduction was fully justified. He, therefore, held that there was no justification for withdrawing the allowance of 5 per cent of the head office expenses on the ground that it was referable to the income earned in India. In this view, the Commissioner (Appeals) did not go into the validity of the reassessment proceedings taken u/s 147(b). The assessee aggrieved by the order of the appellate authority declining to go into the validity of the proceedings u/s 147(b), filed appeals before the Tribunal. Against the decision of the Commissioner (Appeals), holding that the allowance of 5 per cent was justified, the revenue filed appeals before the Tribunal. The Tribunal held that the initiation of proceedings u/s 147(b) by the ITO, on the basis of the audit objection, was not valid in law and that in any event, the disallowance of 5 per cent towards head office expenses was not justified in law. Aggrieved by the order of the Tribunal upholding the assessee''s claim for deduction of 5 per cent towards head office expenses and also upholding the objection of the assessee that the proceedings u/s 147(b) in this case were not legally sustainable, the revenue is seeking to obtain a reference on the above two questions. The question No. 2 relates to the validity of the proceedings initiated by the ITO u/s 147(b) for the assessment years 1972-73 and 1973-74 and the consideration of this question will arise only if it is found that the disallowance of 5 per cent of the expenditure as relating to the head office expenses is not allowable. In this case, it has been found by the Tribunal that though the main business activity of the assessee had been discontinued, it had an insurance agency business and was also running a petrol station at Calicut; apart from that, it had to recover advances made during the course of past years. In respect of these activities, the head office has to keep in touch with the branch offices and also supervise their activities. Therefore, the 5 per cent deduction claimed by the assessee has been held to be reasonable by the Tribunal and on the facts of this case, we are in entire agreement with the Tribunal that 5 per cent of the expenditure of the head office should be taken as relatable to the income earned in India by the assessee. Therefore, on the merits of the reassessment, we find that the disallowance of 5 per cent of head office expenditure, which were relatable to the income earned in India, by the ITO in the reassessment order was not justified in law, and the Tribunal is right in holding that the assessee is entitled to claim the allowance of 5 per cent towards head office expenses. Therefore, we do not think there is any justification for directing a reference on the first question. Since on merits, we have agreed with the Tribunal, it is not necessary to go into the question as to the validity or otherwise of the proceedings initiated u/s 147(b). Therefore, no reference is also called for on this question. The petition is, therefore, dismissed.

No costs.