1. The petitioner applies under Article 226 of the Constitution for relief against proceedings initiated by a notice under Section 148, Income-tax Act, 1961.
2. The petitioner is a partnership firm. It was the sole selling agent of the Kanpur Cotton Mills, a branch of the British India Corporation Ltd. On March 23, 1955, it entered into an agreement with Kailash Nath Agrawal. The agreement recited that it was not in a position to continue the selling agency in accordance with the wishes of the British India Corporation and that it owed Rs. 8,39,351 to the said corporation, and that in the circumstances the corporation desired its resignation from the selling agency and to appoint instead Kailash Nath Agrawal or a business unit controlled by him. The amount owed by the petitioner to the corporation was to be liquidated by the corporation by retaining out of the commission earned by the new selling agent a specified amount to be adjusted against those dues from time to time. On the same day, March 23, 1955, the petitioner informed the corporation of the agreement and tendered its resignation as sole selling agent. Simultaneously, Kailash Nath Agrawal also wrote to the corporation on March 23,1955, referring to this agreement and requested the corporation to appoint M. K. Brothers, a firm of which he was a partner, as sole selling agent. The corporation, on that same day, communicated its acceptance of the petitioner's resignation and of the terms contained in the agreement for the appointment of Kailash Nath Agrawal or his nominee as selling agent and the manner of liquidation of the amount due from the petitioner to the corporation. On March 26, 1955, the board of directors of the corporation, after giving credit for the security of Rs. 1,00,000 provided by the petitioner and the price of 292 bales belonging to it, noted :
"M. K. Brothers had undertaken to pay off gradually the outstanding unsecured debts of Rs. 5 1/2 lakhs due by Messrs. Sharma & Company to the extent of 1/7th of their selling agency commission or Rs. 50,000 per annum whichever is greater until the debt was cleared."
3. During the period ending June 21, 1955, M. K. Brothers paid Rs. 12,500 to the corporation towards the liquidation of the aforesaid amount.
4. In assessment proceedings against the petitioner for the assessment year 1956-57 the Income-tax Officer treated the amount as assessable under Section 10(5A)(d), Indian Income-tax Act, 1922, on the footing that it was received by the petitioner as compensation for the termination of the selling agency. The Appellate Assistant Commissioner, on appeal, took the view that Rs. 4,50,000 was assessable as compensation accruing to the petitioner. In second appeal, the Income-tax Appellate Tribunal set aside this finding and restored the figure of Rs. 12,500. And on reference made to this court, the view taken by the Tribunal was approved.
5. During the previous years relevant to the assessment years 1957-58 to 1959-60, M. K. Brothers paid Rs. 50,000 annually to the corporation on the same account and similarly a sum of Rs. 33,333 during the previous years relevant to the assessment year 1960-61. These amounts were also assessed for those assessment years under section 10(5a)(d) as representing part of the compensation for termination of the agency. A reference is pending in the matter in this court.
6. On March 25, 1966, the Income-tax Officer issued a notice under Section 148 of the Income-tax Act, 1961, to the petitioner for the assessment year 1960-61 (the relevant previous year being the accounting year July 8, 1959). The petitioner says that during the reassessment proceedings, it came to know that a sum of Rs. 3,92,200 out of the aforesaid sum of Rs. 5,50,000 had not been paid by M. K. Brothers and it had been written off on November 13, 1959, by the corporation as a bad debt. The Income-tax Officer intimated that he proposed to assess the petitioner under Section 41(1) of the Income-tax Act, 1961, in respect of that amount for the assessment year 1960-61. The petitioner challenged the proceedings by a petition under Article 226 of the Constitution. The proceedings were quashed on the ground that the Income-tax Officer had failed to apply his mind as to what should have been the true "previous year" in which the amount fell for consideration.
7. On July 27, 1968, the Income-tax Officer issued a fresh notice under Section 148, this time for the assessment year 1961-62. It is not disputed by the respondents that the proceedings so initiated are intended to tax the amount of Rs. 3,92,200 in the hands of the petitioner. The entire argument before us on behalf of the respondents is that the petitioner is liable to tax in respect of that amount either under Section 41(1) or Section 28(ii)(c) of the Income-tax Act, 1961. The petitioner disputes the application of those two provisions and contends in addition that there was no jurisdiction in the Income-tax Officer to initiate the proceedings under Section 148.
8. The first question is whether the Income-tax Officer acted within his jurisdiction in initiating the proceedings under Section 148. A notice under Section 148 is issued for making an assessment or reassessment pursuant to Section 147. Section 147(a) provides for such assessment or reassessment if the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year. The essential basis for such a proceeding is a default by the assessee. Either he has omitted or failed to make a return of all his income chargeable to tax or has omitted or failed to disclose fully and truly all material facts necessary for his assessment. For the Income-tax Officer to have reason to believe that the assessee was guilty of such default, there has to be some material before him on the basis of which he can have such reason to believe. On an examination of the record before us, we are unable to find reference to any such material. Indeed, the respondents do not say anywhere in their counter-affidavit that the Income-tax Officer had such reason to believe. The petitioner has clearly stated in paragraph 15 of the writ petition that before the reassessment proceedings consequent to the notice dated March 25, 1966, it has no knowledge that Rs. 3,92,200 had been written off by the corporation in its account books as a bad debt, that the "write off" was made without its consent or knowledge and it was not communicated to the petitioner by the corporation. In paragraph 12 of the counter-affidavit the respondents merely deny the correctness of the averment. In paragraph 32 of the writ petition, the petitioner affirms that it has not been guilty of any omission or failure to make any disclosure in respect of the sum of Rs. 3,92,200, and in paragraph 33 the petitioner specifically states that the Income-tax Officer could have no reason to believe that any part of its income in the assessment year 1961-62 had escaped assessment or that it was guilty of any omission or failure to disclose fully or truly all material facts necessary for the assessment. The respondents, in paragraph 21 of their counter-affidavit, merely reply that there is no material on the record to support the petitioner's allegation that it had no knowledge of the writing off of the bad debt by the corporation. After weighing the material carefully it seems to us that the respondents have failed to establish that the conditions of Section 147(a) are satisfied. In the circumstances, we hold that upon the record before us no justification has been shown by the respondents for initiating the impugned proceeding by the notice dated July 27, 1968, and consequently that proceeding must be held to be without jurisdiction.
9. Alternatively, if it is considered as a proceeding referable, to Section 147(b), then having regard to the period of limitation of four years prescribed by Section 149(1)(b) the proceeding is barred by time.
10. Even if we assume that the conditions of Section 147(a) are satisfied, is the petitioner liable to tax in respect of the amount of Rs. 3,92,200 under Section 28(ii)(c) or Section 41(1) ? The petitioner contends that neither provision of the Act of 1961 can be invoked, because, if at all, it is the Indian Income-tax Act of 1922 which can be applied. The respondents, on the contrary, say that the Act of 1961 applies because of Section 297(2)(d)(ii), which provides:
"297. Repeals and savings.--(1) ......
(2) Notwithstanding the repeal of the Indian Income-tax Act, 1922 (11 of 1922) (hereinafter referred to as the repealed Act),--......
1(d) where in respect of any assessment year after the year ending on the 31st day of March, 1940,--......
(ii) any income chargeable to tax had escaped assessment within the meaning of that expression in Section 147 and no proceedings under section 34 of the repealed act in respect of any such income are pending at the commencement of this Act, a notice under Section 148 may, subject to the provisions contained in Section 149 or Section 150, be issued with respect to that assessment year and all the provisions of this Act shall apply accordingly."
11. There is no dispute that no proceedings under Section 34 of the Act of 1922 were pending on the commencement of the Income-tax Act, 1961, and, therefore, it is possible to say that Section 297(2)(d)(ii) would come into play. But, it must not be forgotten that when Section 297(2)(d)(ii) declares that a notice under Section 148 may be issued and "all the provisions of this Act shall apply accordingly", it refers merely to the machinery provided by the Act for the assessment of escaped income. It cannot be employed for the purpose of imposing liability to tax where none existed before. The opening words of that provision, that is, "any income chargeable to tax" presuppose that the income which is sought to be assessed is already subject to tax liability. In our opinion, the petitioner is right in the contention that neither Section 28(ii)(c) nor Section 41(1) of the Act of 1961 can be invoked in the present case,
12. We consider next whether the corresponding provisions, section 10(5a)(d) and Section 10(2A) of the Act of 1922, can be invoked. section 10(5a)(d) provides :
"Any compensation or other payment due to or received by,--......
(d) any person, by whatever name called, holding an agency in the taxable territories for any part of the activities relating to the business of any other person, at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto :
shall be deemed to be profits and gains of a business carried on by the............person.............and shall be liable to tax accordingly; and the tax on such compensation or other payment shall, if the assessee so elects, be computed at the average of the rates of income-tax and super-tax applicable to his total income for the three years immediately preceding the previous year in which the compensation or other payment was due or received."
13. Can the amount of Rs. 3,92,200 written off by the corporation in its books be said to be "compensation or other payment due to or received by " the petitioner ? The amount represents part of the larger sum of Rs. 5,50,000 due from the petitioner to the corporation. It has not been paid by the petitioner, and the agreements and the communications of March 23, 1955, contemplated its liquidation by M. K. Brothers. Apparently, that was not found possible and, therefore, the corporation wrote off the amount as a bad debt. We fail to see how this can be construed as compensation or other payment due to or received by the petitioner. Neither was it due to or received by the petitioner nor was it compensation or other payment at or in connection with the termination of the sole selling agency formerly held by the petitioner. Learned counsel for the respondents has been unable to satisfy us that the provisions of section 10(5a) are attracted.
14. As regards section 10(2A), it provides :
"Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee, and, subsequently, during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year."
15. Plainly, this provision is attracted provided an allowance or reduction has been made while computing the profits or gains of a business, profession or vocation in the assessment for any year, the allowance or reduction being made in respect of any loss, expenditure or trading liability incurred by the assessee. Further, the amount subsequently received by the assessee, which is sought to be charged by reason of Section 10(2A), must have been received in respect of that loss or expenditure or must amount to a benefit in respect of such trading liability by way of remission or cessation thereof. There is no evidence before us that the amount of Rs. 3,92,200 relates to any loss or expenditure actually allowed or deducted when computing the profits or gains of the assessee in the assessment for any year. Nor is there anything to show that any benefit derived by the assessee from the writing off of that amount is related to a trading liability for which an allowance or reduction has been made in any such assessment. Further, to invoke Section 10(2A), it appears necessary that the business in which the loss, expenditure or trading liability was incurred, should be in existence during the previous year in which the subsequent receipt is sought to be added as the assessee's profits. See Baroda Traders Ltd. v. Commissioner of Income-tax, [1965] 57 I.T.R. 490 (Guj.). Upon the facts before us, that cannot be said when the selling agency enjoyed by the petitioner had already been terminated.
16. In the circumstances, we hold the petitioner is entitled to relief.
17. The petition is allowed. The notice dated July 27, 1968, issued under Section 148 of the Income-tax Act, 1961, for the assessment year 1961-62 and the proceedings consequent thereto taken against the petitioner are quashed. The petitioner is entitled to its costs.