TMI Blog2005 (4) TMI 617X X X X Extracts X X X X X X X X Extracts X X X X ..... )(a) has resulted in reduction in the amount of loss returned. Assessee company returned a total loss of ₹ 10,76,54,544 and ₹ 7,61,09,733 for the two years respectively. Both the returns were processed under section 143(1)(a) of the Income-tax Act, 1961 (the Act). While processing the return under section 143(1)(a), Assessing Officer made the following disallowances for assessment year 1989-90: (Rs.) 1. Disallowance of Investment allowance on account of non-creation of reserve. ,31,49,567 2. Under Rule 6D ,230 3. Payment to Diners club ,000 4. Under section 43B - ESIS ,552 5. Entertainment expenses ,17,837 ,34,45,186 Thus, the adjusted total loss for assessment year 1989-90 amounted to ₹ 8,42,09,358. Similarly, for assessment year 1990-91, Assessing Officer made the following disallowances: (1) Under section 43-B (Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then went on to record that though the assessee's grievance no longer survived, for the sake of completeness he would deal with the disallowances on merits. Accordingly, he dealt with the merits, allowed a few and disallowed the rest in both the years under appeal. Assessee has not preferred an appeal before the Tribunal since on substantial ground that it is not liable to pay additional tax, it had succeeded. However, department was aggrieved by the order of the CIT(A) and hence this appeal. 5. Shri A.K. Tiwari, the learned D.R., submitted that the order of the CIT(A) cannot survive in view of the retrospective amendment made to section 143(1A) of the Act. The retrospective amendment, in substance, provides that assessee will be liable to pay additional tax even in a case where there is reduction in returned loss on account of adjustments made under section 143(1)(a) of the Act. Therefore, it was submitted by Mr. Tiwari that the appeal of the revenue be allowed. 6. At this juncture, Mr. F.V. Irani, the learned counsel for the assessee invoked Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 (ITAT Rules for short), contending that under the said Rule, assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to be noted is that the appellant (revenue, in this case) should not be worse off by filing an appeal before the Tribunal. It won't be the case here. By the order of the CIT(A), department has not been able to collect any additional tax from the assessee. However, by deciding any of the issues on merits, department may be able to collect some additional tax from the assessee. Therefore, if some of the issues are decided in favour of the assessee, department will not be worse off. 9. However, one argument may be raised by the department on account of the retrospective amendment to section 143(1A) by the Legislature. It may be argued that on account of the retrospective amendment, department would have been able to collect some additional tax despite CIT(A)'s order, and now by permitting the assessee to take recourse to Rule 27, it may be able to collect either lesser or nil additional tax from the assessee. 10. In our view, the argument is quite specious. We may assume a situation where there was an explicit provision to levy additional tax even in loss cases. Despite such a provision, if the CIT(A) decided, for whatever reason, in favour of the assessee that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll stand satisfied if the sum total of the reserve created either in the year of installation or use or in the subsequent year or years is equal to the requisite amount of 75% of the actual allowance of Development Rebate in any year or years. Circular No. 259 is, no doubt, with reference to development rebate. However, Circular No. 305 is with reference to investment allowance wherein the Board has directed the concerned authorities to follow the contents of Circular No. 259 Circular No. 259 has been held to be binding by Gujarat High Court in the case of Bharat Vijay Mills Ltd. v. ITO [1985] 154 ITR 786 and by Patna High Court in the case of CIT v. Tata Robins Frazer Ltd. [1987] 163 ITR 8862 . In the latter case it was held that if in a year, total income is a loss, statutory reserve need not be created. Statutory reserve not having been created, development rebate will not be allowed, but the rebate to be actually allowed in future will be calculated and carried forward to the next assessment year. In the former case, Gujarat High Court issued a writ of Mandamus to follow the above circular of the Board directing the authorities to condone genuine deficiency in creating the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o term loan or not, Assessing Officer was bound to enquire as to whether the interest was payable by the assessee in accordance with the terms and conditions of the agreement governing such loan. This is not only the requirement of clause (d) of section 43B, but otherwise also, it is necessary to go into the terms of agreement to ascertain exactly the reason for the interest remaining unpaid. Such liabilities do not become prima facie inadmissible merely because they are reflected on the liability side of the balance-sheet. Therefore, it was imperative on the part of the Assessing Officer to have enquired into the matter instead of treating it as prima facie inadmissible. We delete the disallowance. 20. The issue relating to the allowance of depreciation was argued by Mr. Irani at the time of the hearing. However, we do not deal with the same as it does not arise out of the order of the CIT(A). 21. In the result, both the appeals of the department are partly allowed for statistical purposes. Shri I.P. Bansal , (Judicial Member) 22. I have perused the order of my learned brother. I remain unable to persuade myself to agree with that order. 23. The revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Ground No. 2 (common to both the appeals) and deleted the levy of additional income-tax being of the view that it cannot be levied in the case where returned loss is only reduced on processing of return. However, the CIT(A) has also given his findings on merits in regard to certain adjustments made which were agitated before him. It appears that some of the adjustments were not agitated in appeal before CIT(A) and also that some concessions were made in respect of certain adjustments. For example, disallowance made under rule 6D of ₹ 74,230 and ₹ 1,000 being payment made to Diner Club for assessment year 1989-90. Similarly for that year, it is observed by CIT(A) as follows: ...However, the main adjustment made for the assessment year 1989-90 relating to the disallowance of investment allowance amounting to ₹ 2,31,49,567 was in order, as admittedly the assessee was not entitled to this deduction for the assessment year 1989-90. The assessee had not created the requisite reserve and could not have been allowed deduction in investment allowance for the assessment year 1989-90. (Emphasis supplied) 25. It is observed that prior to decision of CIT(A), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue the assessee also did not prefer to file cross objections. In these circumstances it can be said that the assessee was quite content with the decisions given by the Commissioner as he did not choose to prefer an appeal and upon receipt of memo of appeal from revenue, he did not prefer to file any cross objections. Now the assessee is only in the capacity of respondent before us. 29. Before us, the learned Departmental Representative contended that in view of the amendment made in statute by Finance Act, 1991 with retrospective effect from 1-4-1989, the law has been made clear that additional Income-tax is leviable even where the loss declared is reduced or converted into income. Thus, the learned Departmental Representative's argument is that the order of CIT(A) deleting the additional tax be reversed being against the provisions of law as in force for the relevant period. 30. On the other hand, Shri F.V. Irani, the learned counsel appearing on behalf of assessee did not controvert the above arguments of learned DR. However, he contended that the adjustments made were wrong as these were not adjustments fit to be made under the provisions of section 143(1)(a). When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Tribunal and therefore it does not fall within the purview of rule 27. 32. Even if for arguments sake it is considered that a new ground may be taken by respondent for the first time before the Tribunal, the fundamental principle is that such new ground should not be prejudicial to the appellant. The cardinal principle is that an appellant cannot be made worse off than before on account of having made the appeal. In this case, the ground urged before us by the learned counsel for the assessee is that it was open to the assessee to create a reserve for investment allowance in any of the subsequent assessment years. Acceptance of this argument amounts to a finding that reserve created by the assessee or which the assessee may now create in relation to subsequent assessment would meet the requirement of section 32A. This in my humble opinion amounts to grant of relief or advantage to the assessee for in excess of the relief originally allowed by the CIT(A). It should also be borne in mind that the assessee had admitted before the learned CIT(A) that he was not entitled to investment allowance. It also appears that it has never been the case of the assessee that he created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) of the Income-tax Act, 1961 can be deleted by the Tribunal. 36. From the reference, it appears that question has been referred in both the assessment years i.e., assessment years 1989-90 and 1990-91 but alleged disallowance of ₹ 2,31,49,567 through adjustment under section 143(1)(a) of investment allowance is involved only in assessment year 1989-90 and not in the other assessment year. The learned representatives of the parties also agreed that the difference between learned Members is confined to the above assessment year on the specified amount and restricted their arguments accordingly. I therefore, proceed to consider the above difference in assessment year 1989-90 only. 37. The Assessing Officer purporting to have disallowed ₹ 2,31,49,567 claimed by the assessee as investment allowance in adjustment and issued show-cause notice to the assessee why additional tax be not levied on the assessee in terms of section 143(1A) of the Income-tax Act on the disallowances made. The assessee thereafter moved application under section 154 of the Income-tax Act challenging the disallowance and adjustments made by the Assessing Officer under section 143(1)(a) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the course of hearing of appeal before the Appellate Tribunal the revenue brought to the notice of the Bench the retrospective amendment made to section 143(1A) of the Income-tax Act and contended that additional tax was leviable even where loss claimed was reduced on account of adjustment made under section 143(1)(a) of the Act. This contention advanced does not appear to have been seriously opposed on behalf of the assessee. On the other hand, the assessee sought to rely on Rule 27 of the Income-tax (Appellate Tribunal) Rules and sought to support the order of the learned CIT(A) by arguing that adjustment/disallowance of ₹ 2,31,49,567 was wrong and could not be made under section 143(1)(a) of the Income-tax Act. The adjustment made was beyond jurisdiction. If adjustment could not be made, question of levy of additional tax did not arise. This way impugned order was supported. 42. The learned Accountant Member found ample force in the contention raised on behalf of the assessee and held in his proposed order that the assessee could support the impugned order of the CIT(A) by invoking Rule 27 of the IT(AT) Rules. He further observed that the assessee could create requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 143(1)(a) of the Income-tax Act. The assessee had merely challenged levy of additional tax before the CIT(A). The assessee was thus raising a totally new ground before the Tribunal, which did not fall within the purview of Rule 27. 45. The learned Judicial Member further observed that even if the assessee was permitted to raise above new ground, the same should not cause prejudice to the appellant as the cardinal principle was that an appellant should not be made worse off than before on account of having filed the appeal. According to the learned Judicial Member, if the assessee was permitted to raise above ground that he could create reserve for claiming investment allowance in any of the subsequent years, this would amount to granting relief or advantage to the assessee far in excess of relief originally allowed by the learned CIT(A). The learned Judicial Member further observed that before the learned CIT(A) the assessee had admitted that he was not entitled to investment allowance and that it was not assessee's case that reserve could be created in the subsequent year. For the aforesaid reasons the learned Judicial Member upheld levy of additional tax o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee made a wrong claim which was disallowed and therefore, he was rightly subjected to additional tax. The learned DR accordingly supported the proposed order of the learned JM. 50. The learned counsel for the assessee shri Irani on the other hand, relied upon and supported the proposed order of the learned AM. He argued that similar disallowances were made in both the assessment years 1989-90 and 1990-91. The learned Judicial Member has agreed with the view of the learned Accountant Member in assessment year 1990-91 in the dismissal of the appeal for that year by invoking Rule 27 of the IT(AT) Rules. But for other assessment year 1989-90 a contrary view has been taken in the proposed order. The mere fact that adjustment in assessment year 1989-90 involved claim of investment allowance and in assessment year 1990-91 involved disallowance under section 43B of the Income-tax Act did not make any difference as far as application of Rule 27 of IT (AT) Rules was concerned. Thus contradictory view taken by the learned Judicial Member was not justified on facts and circumstances of the case. 51. The learned counsel further pointed out that the present assessee had suf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit of an enduring nature notwithstanding the transient nature of the advantage, and obsolescence being faster in electronics industry than in other industries. The Commissioner (Appeals) held that since the assessee had imported a new system represented by designs and drawings and adopted it to suit the Indian conditions and in that process a number of subsidiary modules were developed and added to the imported module and with that a perfect new system was brought into existence, the expenditure on drawings and designs was capital expenditure. The Commissioner (Appeals), however, allowed deduction to the assessee under section 35 of the Act. The Tribunal held that since the assessee was engaged in the field of manufacturing certain equipment in the sphere of electronics and was found to have changed its technology very frequently, the expenditure incurred by the assessee in acquiring designs and drawings from the foreign company was for improving its efficiency or its profit earning apparatus, and the advantage, if any, was not of a permanent degree but shortlived in view of further vast developments in technology and, therefore, the advantage was not in the capital field. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55. However, before I proceed to examine above issue I have to examine application of Rule 27 of the IT(AT) Rules in this case. The learned CIT(A) in the impugned order, held that no additional tax was leviable in this case as resultant figure assessed was a loss and no tax was payable by the assessee. This view as noted above is unsustainable in the light of subsequent amendment made with retrospective effect. The assessee sought to support the order of the CIT(A) on the ground decided against the assessee. The said ground was the view of the learned CIT(A) that adjustment relating to claim of investment allowance amounting to ₹ 2,31,49,567 was rightly made by the Assessing Officer under section 143(1)(a) of the Income-tax Act. The assessee sought to challenge aforesaid finding of the learned CIT(A). In my considered opinion the claim made by the assessee under Rule 27 of the IT(AT) Rules is quite in order. In case it is accepted that the Assessing Officer could not make adjustment of ₹ 2,31,49,567 under section 143(1)(a) claimed as investment allowance, the question of levy of additional tax in terms of section 143(1A) would not arise. Admittedly it is a case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward of the following: Unabsorbed Loans Depreciation to be Carried Forward to subsequent Assessment year. Business Loss : ₹ 89,48,935 Depreciation : ₹ 7,55,56,042 Investment Allowance : ₹ 2,31,49,567 subject to creation of reserve. The Assessing Officer in the intimation issued under section 143(1)(a) disallowed investment allowance of ₹ 2,31,49,567 and deducted the same from returned loss of ₹ 10,76,54,544 as no-reserve had been created . The assessee thereafter moved rectification application dated 23-8-1990 (copy available at page 7 of the Paper Book), asking the Assessing Officer to rectify above order. The above request was rejected by the Assessing Officer holding that there was no mistake in the intimation issued by the Assessing Officer relating to claim of investment allowance. 57. Thereafter the assessee filed an appeal before the learned CIT(A) and among other raised the following ground:-- (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give notice to the assessee and allow time to him to make up the deficiency. 59. I am not making a detailed reference to the statutory requirement of creation of reserve account in the year of loss with reference to section 32A as this issue has been discussed by several courts and is also covered by Circulars of CBDT referred to in the proposed order of the learned Accountant Member. In the case of Tata Robins Frazer Ltd. (supra) their Lordships of Patna High Court as per the head note have observed as under:-- Non-creation of statutory reserve is as bar to allowance of development rebate, but is no bar to quantifying the rebate in terms of the law and carrying it forward. The expression to be actually allowed in section 34(3)(a) of the Income-tax Act, 1961, clearly implied that certain sums will be allowed in future as development rebate in whole or in part. It is axiomatic that until the development rebate is quantified in the relevant assessment year after the installation of the machinery, there cannot be any question of carrying forward of the rebate. If it is not quantified, nothing will be available for carrying forward and the assessee will be denied the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquired might have been installed or put to use in that year. High Courts have clearly held that investment allowance is required to be quantified in the year in which machinery is installed or put to use and is required to be carried forward although total income is a loss and statutory reserve is not created. Investment allowance would be allowed only in the year in which statutory reserves are created and there is profit. The proposition that investment allowance is to be quantified even in case of loss and non-creation of reserve follows from use of expression, to be actually allowed in section 34(3)(a) of Income-tax Act and other similar provisions. Thus there was nothing wrong with the claim of the assessee that investment allowance be determined (computed) to be carried forward for adjustment in the subsequent years. Investment allowance reserve would be created in the year investment allowance was to be actually allowed. The claim made by the assessee could not be treated as prima facie wrong and inadmissible and disallowed under section 143(1)(a) of Income-tax Act. At any rate, the claim made was debatable and could not be rejected as done by the revenue authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X
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