1995 (3) TMI 163 - AT - Income Tax

Summary

Issues Involved:
1. Whether the adjustment of Rs. 41,24,150 as "Unaccrued and unrealised profit on sale of investments" is permissible under section 143(1)(a).
2. Whether the change in the method of accounting from mercantile to cash basis for profit on sale of investments is allowable.
3. Whether the Assessing Officer's adjustment qualifies as a prima facie adjustment under section 143(1)(a).

Issue-wise Detailed Analysis:

1. Adjustment of Rs. 41,24,150 as "Unaccrued and unrealised profit on sale of investments":

The assessee, a company engaged in share dealing, filed a return declaring a loss and adjusted the net profit by Rs. 41,24,150, citing "Unaccrued and unrealised profit on sale of investments to be offered as income on cash basis." The Assessing Officer disallowed this adjustment under section 143(1)(a), reducing the returned loss and charging additional tax. The assessee contended that this adjustment was not permissible within the purview of section 143(1)(a) and filed a petition under section 154, which was not acted upon, leading to an appeal before the Commissioner (Appeals).

The Commissioner (Appeals) upheld the Assessing Officer's decision, stating that the deduction claimed was not supported by the audited accounts and that the unilateral change in accounting method was not permissible. The Commissioner noted that the profits accrued in the year of the contract under the mercantile system and rejected the assessee's plea that no profit accrued due to the lack of physical delivery of shares.

2. Change in Method of Accounting:

The assessee claimed a change in the accounting method for income tax purposes, shifting to a cash basis for profit on sale of investments while maintaining the mercantile system for other transactions. The Commissioner (Appeals) rejected this change, stating that the accounts were audited on a mercantile basis and the unilateral change was not permissible. The Commissioner emphasized that the profit from share dealings was included in the audited Profit and Loss Account and highlighted in the Directors' Report.

3. Prima Facie Adjustment under Section 143(1)(a):

The Tribunal examined whether the adjustment made by the Assessing Officer could be termed as a prima facie adjustment under section 143(1)(a). The Tribunal referred to various judicial decisions and Board Circulars, which clarified that adjustments under section 143(1)(a) should be based on information available in the return, accounts, or accompanying documents and should be prima facie admissible or inadmissible.

The Tribunal noted that the assessee's claim for deduction was supported by a Supreme Court decision (E.D. Sassoon & Co. Ltd. v. CIT) and involved a debatable question of law. The Tribunal concluded that the adjustment made by the Assessing Officer was not a prima facie adjustment and could not have been made in an intimation under section 143(1)(a). The Tribunal set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to complete a regular assessment under section 143(3) after issuing due notice to the assessee and making proper enquiries regarding the admissibility of the assessee's claim.

Conclusion:

The Tribunal allowed the assessee's appeal, setting aside the intimation under section 143(1)(a) and directing the Assessing Officer to complete a regular assessment under section 143(3) after making due enquiries regarding the assessee's claim for deduction of Rs. 41,24,150 from the net profit as per the Profit and Loss Account.