1997 (1) TMI 117 - AT - Income Tax

Summary

Issues Involved:
1. Validity of treating the return as 'non est'.
2. Legality of action under section 147 of the Income-tax Act.
3. Taxability of interest received on surplus funds.
4. Charging of interest under sections 139(8), 215/217 of the Act.

Detailed Analysis:

1. Validity of Treating the Return as 'Non Est':
The appellant company filed a return of income on January 19, 1987, declaring Nil income. The Assessing Officer (AO) deemed this return defective due to an incomplete verification section and requested rectification within 15 days. The appellant filed a fresh return on October 19, 1987, again declaring Nil income. The AO treated this return as 'non est' on March 31, 1989, citing section 139(10) of the Income-tax Act, 1961, which deems a return showing total income below the non-taxable limit as never furnished. The Tribunal found that since the income of a company is taxable from the first farthing, a return showing Nil income does not fall below the taxable limit. Thus, the AO's action of treating the return as 'non est' was justified.

2. Legality of Action Under Section 147:
The AO initiated proceedings under section 147, believing that income had escaped assessment. The appellant argued that this was due to a change of opinion and that all facts were disclosed in the original return. The Tribunal upheld the AO's action, stating that the return being treated as 'non est' meant it was never furnished. The Tribunal also agreed with the CIT(A)'s view that the amended provisions of section 147, effective from April 1, 1989, applied as it was a procedural law.

3. Taxability of Interest Received on Surplus Funds:
The appellant earned interest on surplus funds during the construction period and sought to set it off against interest expenses incurred during the same period. The AO assessed this interest as 'income from other sources', a view upheld by the CIT(A). The Tribunal, however, found that the interest earned on short-term deposits should be set off against interest paid, following the decision in the case of Indo-Gulf Fertilisers Chemicals Corporation Ltd. and the Bombay High Court's ruling in Maharashtra Electrosmelt Ltd. The Tribunal concluded that the interest received was not assessable as revenue receipts but should be set off against the interest paid, thus absolving the entire interest income from tax.

4. Charging of Interest Under Sections 139(8), 215/217:
Given the Tribunal's finding that the interest received was to be set off against the interest paid, resulting in no taxable income, there was no basis for charging interest under sections 139(8) or 217. This issue was rendered academic and consequentially dismissed.

Conclusion:
The Tribunal allowed the appeals, holding that the returns should not have been treated as 'non est', the action under section 147 was valid, and the interest received on surplus funds should be set off against the interest paid. Consequently, no interest under sections 139(8) or 217 was chargeable.