1. By this petition, filed under Article 226 of the Constitution of India, the petitioners are challenging the legality of the notice under section 148 of the I. T. Act, 1961 (hereinafter referred to as "the Act").
2. The notice dated May 3, 1978 was served upon the petitioners by respondent No. 1-the I.T.O.
3. The petitioners are a private limited company carrying on business as engineering and technical consultants offering a wide variety of consultancy services. The petitioners enter into various contracts and claim the benefit under the provisions of section 80-MM of the Act. The benefit of the section is claimed only in respect of the knowhow covered by the clauses in the contract. The petitioners have an Operation Department which prepares, in respect of each consultancy contract, a man-hour budget sheet which allocates man-hours for each activity to be performed under the contract. It is then possible to ascertain the man-hours which will be expended on the specific activities covered by the clauses approved by the Board as being eligible for the benefit of section 80-MM of the Act. Section 80-MM of the Act provides that the assessee hag to file application for approval of receiving the benefit and tile application for approval must be made to the Board before the Ist day of October, of the relevant assessment year.
4. The I. T. O. Held several hearings in respect of the assessment in the Year 1974-75, and ultimately the assessm ent was complete l my an order dated January 29, 1976. The I. T. O. Allowed the petitioners' deduction tender section 80-1IM of the Act at 40of Rs. 8,14,214 but, however, restricted the total amount of this deduction to Rs. 1,39,846.
5. The petitioner preferred an appeal to the A. A. C. N-Range, Bombay, and at the same time filed an application for rectification before the I. T.O. The I. T. O. Rectified the order on March 2, 1976, in exercise of the powers under section 154 of the Act and re-worked deduction under section 80-MM of the Act at the figure of Rs. 2,07,049 that is, to the extent of the petitioners gross total income. On June 11, 1976, the I. T. O. Passed another rectification order, and the deduction under section 80-MM of the Act was allowed to the extent of the gross total income then available by a reduction o Rs.
6. 20,000. The appeal preferred by the petitioners was disposed of by the A. A. C. And respondent No. I passed an order giving effect to the order of the A. A. C. The deduction under section 80-MM of the Act was further reduced to the extent of the gross total income then available, which was Rs.
7. 1,72,241.
8. Certain correspondence took place between the petitioners and responder No. 1 and respondent No. 1 was enquiring as to whether the deduction of Rs. 1,72,241 allowed under section 80-MM of the Act has been calculated on the gross consultancy fees or on the not receipts received by the petitioners. Respondent No.1 thereafter served the impugned notice on May 3, 1978, The notice does not disclose the ground which appealed to the I. T. O. To re-open the assessment, nor the demand made by the petitioners for furnishing the grounds was complied with. The petition -have, therefore, approached this Court by riling the present petition.
9. Shri Dastur, the learned counsel appearing in support of the petition, has made a two-fold submission to challenge the legality of the notice. The learned counsel submitted that the assumption of the I. T. O. That the deductions under section 80-MM of the Act are to be worked out on the basis of the not receipts for rendering appropriate consultancy services is wholly incorrect and contrary to the decisions of the Supreme Court. Secondly Shri Dastur urges that the exercise of power by the I. T. O. Under section 147 of the Act was without any basis, and the course adopted by respondent) No. I is nothing short of change of opinion. In my judgment, both the submission of the learned counsel deserve acceptance. Shri Dastur relied upon the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Additional C. I. T. ((1979) 118 I T R 243). The Supreme Court, on page 260 of the report, considered the contention with reference to section 80-MM of the Act and observed.
10. "It appears on a plain reading of these sections that the deduction admissible is in respect of the whole of the income received by the assessee and not in respect of the income computed after making the deductions provided under the Act."
11. Reference was made to Madras Auto Service's case ((1975) 101 I T R 589 (Mad.)) and Addl. C. I. T.
12. Isthmian v. Indian Maritime (P.) Ltd. ((1978) 113 I T R 570 (Mad.)).
13. From the judgment of the Supreme Court it is crystal clear that the assumption of the I. T. O. That the deduction under section 80-MM of the Act has to be allowed on the basis of not receipts was totally unsustainable.
14. The impugned notice requires to be struck down on this count alone.
15. The submission of Shri Dastur that the assumption of jurisdiction under section 147 of the Act by respondent No. 1 was without any basis and was totally misconceived also requires acceptance.
16. The notice does not set out any reasons which prompted the I. T. O. To exercise the jurisdiction. The queries made by the petitioners about the material in possession of the respondents to come to the conclusion that the case was one of the escaped assessment were not answered. The respondents have not filed any return in answer to the petition, and in such circumstances it is impossible to hold that the requirements of section 147 of the Act are complied with. In these circumstances, the impugned notice is required to be quashed.
17. Accordingly, the petition succeeds and the rule is made absolute in terms of prayer (a) of the petition. In the circumstances of the case, there will be no order as to costs.