2005 (9) TMI 257 - AT - Income Tax

Summary

Issues Involved:
1. Validity and acceptance of the return filed on 29th Dec., 1989, and the entitlement for the carry forward of assessed loss.
2. Deletion of income of Rs. 13,91,500 which the AO declined to deduct from the returned income.
3. Deletion of addition of Rs. 38,67,117 which represented the export incentive added by the AO on the basis of assessee's own return.

Issue 1: Validity and Acceptance of the Return Filed on 29th Dec., 1989, and Entitlement for Carry Forward of Assessed Loss
The Department contended that the assessee's return filed on 29th Dec., 1989, was not valid as it was provisional and lacked audited accounts. The original assessment under s. 144 was set aside due to lack of opportunity for the assessee to be heard. The assessee had filed a provisional return showing a loss of Rs. 3,34,87,490 without audited accounts but with a provisional tax audit report. A revised return was filed on 15th Jan., 1991, showing a loss of Rs. 4,13,88,439, including depreciation, based on audited accounts. The CIT(A) held that the return was in the prescribed form and verified manner, and since no notice under s. 139(9) was issued by the AO, the acceptance of the return filed on 29th Dec., 1989, could not be denied. The Tribunal agreed, stating that the word "provisional" did not make the return defective and cited s. 292B, which deems returns valid if they conform to the Act's intent and purpose. The Tribunal referenced CIT vs. Garia Industries (P) Ltd., where a return without an auditor's report was treated as valid. The return filed on 29th Dec., 1989, was deemed valid under s. 139(3) r/w s. 139(1), and the revised return on 15th Jan., 1991, was valid under s. 139(5). The assessee was entitled to carry forward the loss as determined by the AO. The Tribunal dismissed this ground of the Revenue.

Issue 2: Deletion of Income of Rs. 13,91,500
The Department argued that the assessee did not provide supporting evidence to exclude the income of Rs. 13,91,500 shown as compensation under "Other income". The assessee claimed the compensation for defective equipment supplied by General Electric Company Ltd., which was later replaced, leading to the deletion of the compensation income. The AO rejected the claim due to lack of correspondence evidence. The CIT(A) deleted the addition, stating the AO could not prove the income had arisen to the assessee. The Tribunal upheld this decision, noting that the replacement of defective parts did not amount to real income and cited Kedarnath Jute Mfg. Co. Ltd. vs. CIT, which held that book entries do not determine real income. The Tribunal agreed that the compensation entry was hypothetical and reversed, thus not taxable. This ground of the Revenue was dismissed.

Issue 3: Deletion of Addition of Rs. 38,67,117
The Department contended that the CIT(A) erred in deleting the addition of Rs. 38,67,117, representing export incentive income. The assessee had credited this amount in the P&L account by mistake, misunderstanding the Import and Export Policy, and later reversed the entry. The AO rejected the reversal claim, treating it as income. The CIT(A) deleted the addition, noting the AO did not establish that the amount was receivable or received by the assessee. The Tribunal agreed, stating that notional/hypothetical income not materialized cannot be taxed as real income, referencing Bokaro Steel Ltd. and Kedarnath Jute Mfg. Co. Ltd. The AO failed to show any material proving the income had accrued or arisen. The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed this ground of the Revenue.

Conclusion:
The appeal of the Department was dismissed on all grounds. The Tribunal upheld the CIT(A)'s decisions regarding the validity of the return filed on 29th Dec., 1989, the deletion of the income of Rs. 13,91,500, and the deletion of the addition of Rs. 38,67,117.