1975 (7) TMI 43 - HC - Income Tax

Assessment Order Business Expenditure Deduction In Respect Excise Duty Expenditure On Scientific Research High Court To Interfere In Part Income Tax Act Mercantile System Natural Justice Previous Year Writ Jurisdiction Writ Petition

Summary

Issues Involved:
1. Violation of principles of natural justice.
2. Legality of conditions imposed by the Income-tax Officer for changing the previous year.
3. Application of Section 41(1) of the Income-tax Act regarding cessation of liability.
4. Deduction of excise duty liability.
5. Deduction of expenditure on scientific research under Section 35 of the Income-tax Act.

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The court found that the Income-tax Officer (ITO) violated the principles of natural justice by not providing the petitioner-company with a reasonable opportunity to present its case. The company was given only two days to respond to a significant change in the assessment, which was insufficient given the complexity and stakes involved. The ITO's rush to complete the assessment due to the impending limitation period was his own fault, and the company should not suffer because of it. The court held that the assessment order was void due to this violation.

2. Legality of Conditions Imposed by the Income-tax Officer for Changing the Previous Year:
The court examined the conditions imposed by the ITO when granting permission to change the previous year from 30th June to 31st December. It found conditions (a) and (d) to be invalid. Condition (a) was deemed impossible and illegal as it required the company to ensure no loss in the last six months, which is contrary to the Income-tax Act's provisions. Condition (d) was ambiguous and superfluous, as it suggested that the change should not result in a reduction of tax liability, which is an inherent possibility when changing accounting periods. The court held that these conditions were contrary to law and beyond the jurisdiction of the ITO to impose.

3. Application of Section 41(1) of the Income-tax Act Regarding Cessation of Liability:
The ITO had invoked Section 41(1) to treat the past excise duty liability as income, arguing that the liability had ceased following a Delhi High Court judgment. However, the court found that since the judgment was under appeal, the liability had not ceased irrevocably. A cessation of liability must be final and irrevocable, which was not the case here. The court held that the ITO had no jurisdiction to invoke Section 41(1) as the liability was still under judicial scrutiny.

4. Deduction of Excise Duty Liability:
The court addressed the company's claim for deduction of excise duty liability, which was being disputed in court. Following the Supreme Court's ruling in Kedarnath Jute Manufacturing Co. v. Commissioner of Income-tax, the court held that an assessee following the mercantile system of accounting could claim deductions for business liabilities even if disputed. The ITO's disallowance of the deduction was incorrect, and the company was entitled to claim it.

5. Deduction of Expenditure on Scientific Research under Section 35 of the Income-tax Act:
The court found that the ITO had no jurisdiction to adjudicate on the company's claim for deduction of scientific research expenditure. The matter should have been referred to the Central Board of Direct Taxes and then to the prescribed authority, whose decision would be final. The ITO's provisional disallowance, subject to the decision of the prescribed authority, was unauthorized and beyond his jurisdiction. The court emphasized that the ITO must follow the proper procedure and cannot act on instructions from the Board regarding assessment controversies.

Conclusion:
The court quashed the impugned assessment order and directed the ITO to make a fresh assessment in accordance with the law, considering the previous year as ending on 31st December, 1971. The petitioner was entitled to costs.