Holding

The reassessment was valid under clause (b) of s.147 as the officer obtained new information showing escaped income, and the barred assessment against the agents does not prevent a direct reassessment of the non‑resident assessee.

Summary

Claggett Branch Ltd., a non‑resident company dealing in tobacco, had its income for assessment years 1959‑60 and 1960‑61 originally assessed on the basis of returns filed by its Indian agents under s.23(3) of the Income‑Tax Act, 1922. While assessing the later year 1962‑63 the Income‑Tax Officer discovered that the overhead expenses had been allocated only to the purchase‑sale business and not to the commission business, leading him to conclude that income had escaped assessment for the earlier years. He issued reassessment notices under s.148 to the agents, but the notices were barred by s.149(3) because the two‑year limit had expired, so the proceedings against the agents were dropped and a notice was served directly on the assessee. The reassessments were challenged; the Income Tax Appellate Tribunal held they were without jurisdiction, but the Andhra Pradesh High Court held that the officer had obtained new information and that the barred assessment against the agents did not preclude a direct reassessment of the non‑resident. The Supreme Court affirmed the High Court, holding that the reassessment fell within clause (b) of s.147 and that a direct assessment of the non‑resident was permissible.

Issues considered

Whether a reassessment under s.147/148 of the Income‑Tax Act is justified when the assessing officer changes the method of computing profits based on information discovered after the original assessment.
Whether, when the original assessment was made on an agent of a non‑resident, a reassessment can be initiated directly against the non‑resident assessee if the assessment against the agent is barred by the limitation provision of s.149(3).

Legislation cited

Income Tax Act, 1922s. 23(3), s. 43
Income Tax Act, 1961s. 147, s. 148, s. 149(3)

Subjects

Income TaxReassessmentNon‑residentAgentsSection 147Section 148Section 149Overhead expensesJurisdiction

Judgment

CLAGGEIT BRACH! CO. ·LTD., LONDON
A
v.
COMMISSIONER OF INCOME-TAX, A.P.

APRIL 26, 1989

[R.S. PATHAK, CJ, AND RANQANATH MISRA, J.] B

) Indian Income Tax Act, 1922/lncome Tax Act 1961: Section
23(3)/Section 147-149-Reassessment consequent on change in m~thod
of computation of profits-Whether permissible-Original assessment
made on agents-Reassessment-Whether could be initiated .against
r,i~sessee ..\
c
; - }- The appellant-assessee, a non-resident sterling company, carry·
ing on business of purchase and sale of tobacco, on its own and for
commission, effected purchases through its Indian agents. The agents
filed returns of income on behalf of the assessee for the assessment years
1959·60 and 1960-61. The Income-tax Officer completed the assessment D
to tax under s. 23(3) of the Indian Income-tax Act, 1922.

However, in the course of assessment proceedings for the assess·
··~. ment year 1962·63, the.Income-tax Officer noticed that there was a
mistake in computing the overhead expenditure. Therefore, in the
I opinion that income had escaped assessment for the two assessment
years he issued notices to the statutory agents, under s. 148 of the
E

Income-tax Act, 1961, but dropped the proceedings, upon the agents'
. objection to the issue of the notice of reassessment on the a~ent of a
non-resident assessee after the expiry of two years from the end of the
( relevant assessment year.
F
~ ~ Thereupon the Income Tax Officer issued notice directly to the
assessee. The assessee tiled returns for both the years under protest.·
Rejecting the assessee's contention that it could not be served with the
notices since its agentS had already been proceeded against, the Income
Tax Officer made reassessments on the assessee for the two assessment ·
years. G
-f The appeals tiled by the assessee were dismissed by the Appellate
Assistant Commissioner. In second appeal, the Income-Tax Appellate
Tribunal held that the reassessments were without jurisdiction, as they
were proceeded on a mere change of opinion of the Income Tax Officer
and that the assessee could not be proceeded against ·directly as the 'H
731
732 SUPREME COURT REPORTS [1989] 2 S.C.R.

assessments were made originally on the agents.
A
On a re~rence made at the instance of the Revenue, the High
Court held that reassessments were not made due to a mere change of
opinion of the Income Tax Officer, but pursuant to information
~eceived subsequent to the original assessments from the records of the
B subsequent assessment year that the overhead expenses related to the \
entire business, including the business as commission agents, and no\
merely to the business of purchase and sale of tobacco, and that then: .
was nothing to prevent the Income Tax Officer from proceeding
directly against the assessee and re-assessing it for the two assessment
years, when he found that reassessment proceedings could not be taken
C against the agentS.

In the appeal before this Court, on behalf of the assessee, it was -\ -
contended that the Income Tax Officer had no jurisdiction to take
proceedings under ss. 147 and 148 of the Income-tax Act because the ~
conditions pre-requisite for making the reassessments were not satis-
D fied, and it was not open to the Income Tax Officer to take assessment
proceedings against the assessee when he had taken assessment pro-
ceedings against the Indian agent.

Dismissing the, appeals,

E HELD: 1. The Income Tax Officer came to realise that income
had escaped assessment for the two assessment years when he was in the
process of making assessment for a subsequent assessment year. While
making that assessment, he came to know from the documents per-
taining to that assessment that the overhead expenses related to the
entire business, including as commission agents, and not confined to the y
F business of purchase and sale. The attention of the Income Tax Officer ).
was not directed by anything before him at the time of original assess-,,..,...
ment to the fact that the overhead expenses related to the entire
business. In the circumstances, there is no doubt that the case falls
within the terms of cl. (b) of s. 147 of that Act and there was justifica-
.,
tion for initiating the proceedings for reassessment for the two assess-
G ment years in question. [736A-D]

2. It is open to an Income Tax Officer to assess either a
non-resident assessee or the agent of such non-resident assessee.
But if an assessment is made on one there can be no assessment on the
other. [736E]
H
CLAGGETT BRACH! v. C.!.T. [PATHAK, CJ! 733

~· -1 Therefore, in the instant case, ifthe assessment had been made on
A
· the Indian agent, thee assessment could not have been made on the
assessee. However, the reassessment proceedings commenced on the
agent were barred by time by reason of s. 149(3) of the Act. The issue of
notice under s. 148 of the Act to the agent after the expiry of two years
from the end of the relevant assessment year is prohibited by the
statute. Hence, the assessment proceedings against the agent have to be B
~ ignored, and cannot operate as a bar ~o assessment proceeding directly
Jgainst the assessee. [736F-G]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 208
and 209 (NT) of 1975.

From the Judgment and Order dated 4th August, 1971 of the c
- f- Andhra Pradesh High Court in Reference Case No. 12 of 1968.
I
K.B. Rohtagi for the Appellant. \

D
V. Gauri Shankar and Ms. A. Subhashini for the Respondent.

The Judgment of the Court was delivered by

PATHAK, CJ. These appeals by special leave are directed
against the judgment of the High Court of Andhra Pradesh answering E
the following two questions of law in favour of the Revenue and
against the assessee:

1. Whether the Tribunal .was right in holding that the re-assess-
ments being only consequent on a change as to the method.of
computation of the profits the initiation of proceedings under F
s. 148 for each of the assessment years 1959-1960 and 1960-61
was justified?

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 re-assessment proceedings could not be .G
initiated against the assessee direct?

The appellant assessee is a non-resident sterling company whose
business consists in the purchase of tobacco from India and its sale
outside. The tobacco is sold directly on the assessee's own account and
for commiss.ion on behalf of others. The purchases of tobacco. were H
734 SUPREME COURT REPORTS [1989] 2 S.C.R.

effected through the British India Corporation Ltd., Guntur, whot-- '
A
were appointed agents of the assessee under s. 43 of the Indian
Income-tax Act, 1922. For the assessment years 1959-60 and 1960-61,
the agents filed returns of income on behalf of the assessee. The
Income-tax Officer, Guntur, after examining the balance-sheet and
profit and loss account of the assessee for the relevant previous years,
B the calendar years 1958 and 1959, completed the assessments under s. \_,
23(3) of the Indian Income-tax Act, 1922. For ihe year 1958 the gross ""\
profit on the sale of Indian tobacco, including commission, was sho\"1
in the balance-sheet and profit and loss account of the assessee at
£11, 108. As the assessee carried on business not only in India but in
other places, the Income Tax Officer worked out the proportionate
overhead expenses of the assesse for its business in India at £16,760
taking the total sales of tobacco at £534031 and the sales of Indian
tobacco at £448590. The Income Tax Officer computed the loss at-\ -·
£5652, and one-half of this amount namely £2826 (Rs.37680) was taken
as the ad juste.d loss, being the percentage attributable to the purchas-
ing operation in India. On the same basis for the assessment year
D 1960-61, after setting off the income against the previous loss, the total
loss was found to be Rs.96,482.
Subsequently, in the course of assessment proceedings for the
assessment year 1962-63, the Income Tax Officer appears to have j.._,,
noticed that a mistake had been committed in the computation of the ·
over-head expenditure. The return filed on behalf of the assessee for
E
that year had disclosed that the over-head expenses were attributable
to the entire business of the assessee, including the blJsiness as com-
mission agents, and not merely for the business of purchase and sale of
tobacco. The Income Tax Officer believed that he ought to have first
-
computed the proportionate overhead expenses in relation to the total
profits by taking the proportion which the profits bore to the total of Y
F profits and commission, and then worked out the proportionate over- (
head expenses for the profits arising out of the Indian sales. On thaf"'°'·
basis he determined that the adjusted profits would be £160 (Rs.2253),
and this would have to be substituted in place of the loss of Rs.37 ,680
arrived in the original assessment. Similarly for the assessment year
1960-61 the Income Tax Officer realised that the original assessment
would have to be varied accordingly. In the opinion that income had 1--
escaped assessment for the two assessment years 1959-60 and 1960-61,
he issued notices on 18 January, 1964 under s. 148 of the Income Tax
Act, 1961 to the statutory agents. The agents contested the validity of
the notices and contended that in view of s. 149(3) of the Act no notice
H of re-assessment could be served on the agent of a non-resident asses-
see after the expiry of two years from the end of the relevant assess-
CLAGGETI BRACH! v. C.l.T. [PATHAK, CJ I 735

)- -1ment year. The Income-Tax Officer upheld the objection and dropped
A
the proceedings.
Thereupon the Income Tax Officer issued notice under s. 148 for
the two assessment years directly to the assessee to their London
address on 29 February, 1964. The assessee filed returns on 19 August;
1964 for both the years under protest, contending that it could not be
-r.·served with those notices inasmuch as the Income Tax Officer had
B
'al.ready· p-roceeded against its agents. The Income Tax Officer rejected
t~e objections and made re-assessments on the assessee for the two
assessment years.
The appeals filed by the assessee before the Appellate Assis\ant
·commissioner were dismissed, but iiI second appeal the Income~!fax
Appellate Tribunal took the view that the re-assessments proceeded c
- tnn a mere change of opinion on the part of the Income Tax Officer
and, therfore, were without jurisdictiion, and further as the assess-
ments had been made originally on the agents it was not open to the
Income Tax Officer to proceed directly against the assessee. Accord-
ingly, the Appellate Tribun~l allowed the appeals and set aside the D
re-assessments made on the assessee.
At the instance of the Revenue, the Appellate Tribunal referred
. 1 the two questions of law set forth earlier to the High Court of Andhra
~ Pr11desh for its opinion. On the first question the High Court held that
it was not a mere change of opinion on the part of the Income Tax
Officer pursuant to which he made. the re-assessments, but that the E

- Income Tax Officer had received information subsequent to the origi-
nal assessments from the records of the subsequent assessment year
that the overhead expenses related to the entire business, including the
business as commission agents, and not merely to the business of the
~~urchases and sales of tobacco. On the second question the High
Court held that there was nothing to prevent the Income-tax Officer, F
. hen he found that re-assessment proceedings could not be taken
against the agents, from proceeding directly against the assessee and
re-assessinglt for the two assessment years. ·
Two points have been urged before us·by learned counsel for the
_ ~_J assessee. It is contended that the Income Tax Officer has no jurisdic- G
- -1 tion to take proceedings under ss. 147 and 148 of the Income-tax Act
.because the conditions pre-requisite for making the reassesssments
were not satisfied. The re-assessments were made with reference to cl.
(b) of s. 147 of the Act, and apprarently the Income Tax Officer
proceeded on the basis that in consequence of information in his
possession he had reason to believe that income charg.,able to tax had H
736 SUPREME COURT REPORTS [1989] 2 S.C.R.
I
escaped assessment for the two assessments years. From the material 1' {
A
before us it appears that the Income Tax Officer came to realise that
income had escaped asssessment for the two assessment years when he
was in the process of making assessment for a subsequent assessment
year. While making that assessment he came to know from the docu-
ments pertaining to that assessment that the overhead expenses
B related to the entire business including the business as commission \).'
agents and were not confined to the business of purchase and sale. It i~ · 1
true, as the High Court has observed, that this information could ha'~

c
been acquired by the Income Tax Officer if he had exercised due
diligence at the time of the original assessment itself. It does not
appear however, that the attention of the Income Tax Officer was
directed by anything before him to the fact that the overhead expenses
related to the entire business. The information derived by the Income
-
Tax Officer evidently came into his possession when taking assessment"~ -
proceedings for the subsequent year. In the circumstances, it cannot
be doubted that the case falls within the terms of cl. (b) of s. 147 of the
Act, and that, therefore, the High Court is right in holding against the
D assessee.

The second point urged before us is that when the Income tax
Officer had taken the assessment proceedings against the Indian agent
of the assessee it was not open to him to take assessment proceedings )-.,
against the assessee. It is open to an 'Income Tax Officer to assess
E either a non-resident assessee or to assess the agent of such non-
resident assessee. It cannot be disputed also that if an. assessment is
made on one there can be no assessment on the other, and therefore, ~
in this case if the assessment had been made on the Indian agent the
assessment coud not have been made on the assessee. However, the
facts show that the re-assessment proceedings commenced on the -y
F agent were found to be barred by time by reason of s. 149(3) of the
Act. The issue of notice under s. 148 of the Act to the agent after the,-i
expiry of two years from the end of the relevant assessment year is
prohibited by the statute. The Income Tax Officer dropped the pro-
ceedings when he was made aware of that prohibition. The assessment
proceedings taken by him against the agent have to be ignored and
G cannot operate as a bar to assessment proceeding directly against the ~.
assessee. On this point also the High Court has taken the correct view
when it answered the question in favour of the Revenue.

In the result the appeals fail and are dismissed with costs.

N.P.V. Appeals dismissed.