The law laid down by jurisdictional High Court being binding, prima facie adjustments can be made in order u/s 143(1) even if issue is debatable – so held by the Supreme Court also a case showing double standard followed by tax authorities increasing litigation.

[CA DEV KUMAR KOTHARI]

The law laid down by jurisdictional High Court being binding, prima facie adjustments can be made in order u/s 143(1) even if issue is debatable – so held by the Supreme Court also a case showing double standard followed by tax authorities increasing litigation.

Primary provision for the related judgment and this write-up is S.143(1) (a) related with the judgment and this article- https://www.taxmanagementindia.com/Print/print_Act_Rule.asp?ID=3296.

Other provisions S.35D and S.37 considered for alternate claims making the issue debatable and also for difference of opinion of High Courts/ Experts on related issue.

Dy. Commissioner of Income Tax Versus M/s. Raghuvir Synthetics Ltd. 2017 (4) TMI 975 - SUPREME COURT

Earlier article:

Article Published at 189 CTR Part IV dt. 09.07.2004 titled “PROVISION TO FOLLOW ORDERS OF HIGHER COURTS/ AUTHORITIES AND WIDER SCOPE OF RECTIFICTION FOR SIMPLIFICATION OF PROCEDURES AND REDUCTION OF LITIGATION”,

Binding law as per judgment of High Court:

As per provisions of the Indian Constitution law declared by the High Court is binding on all within  area of jurisdiction of the High Court. So a judgment rendered by the High Court hold the filed until and unless the judgment is reversed by the Supreme Court of India. Such judgment has to be followed.

Prima facie adjustments:

Prima facie adjustments can be made u/s 143(1) of the Income-tax Act,1961. The scope of such adjustments is considered as very limited. And it was general understanding that any debatable issue cannot be considered for making prima facie adjustment. Particularly if there are difference of opinion amongst High Courts, it was viewed that an adjustment cannot be made u/s 143.1 based on judgment of jurisdictional High Court.

Readers are advised to look into law, as applicable from time to time and for any particular year while considering implications of the judgment of the Supreme Court.

Case of Raghuvir Synthetics Ltd:

In this case the assessee claimed expenses for issue of capital as revenue expenditure u/s 37 and also put an alternate claim that if it is not allowed as revenue expenditure, then the same may be allowed by way of amortization u/s 35D over ten years or by capitalizing in assets and allowing depreciation.

The AO treated expenses as capital expenditure and allowed 1/0^th deduction u/s 35D by way of making prima facie adjustment u/s 143(1).

On appeal of assessee, CIT(A) deleted the adjustment as the issue was debatable and not within scope of S.143(1) adjustments. On appeal of revenue first Tribunal and then on further appeal the High Court held that the adjustment on debatable issue cannot be made u/s 143(1). Thus till stage of High Court, the contention of assessee was approved.

On appeal of revenue, before the Supreme Court, though the Supreme Court held that the issue may be debatable, but when there is judgment of the High Court of Jurisdiction ( in this case Gujarat High Court), even a prima facie adjustment can be made because judgment of the High Court is binding and is law declared. Therefore, concurrent decision / judgment of three appellate authority / Courts was reversed.

No representation by assessee:

As noted by the Supreme Court “Nobody has put in appearance on behalf of the respondent”.

Thus the assessee remaining absent, the Supreme Court decided issue based on arguments of the counsel of Revenue only. Had assessee made a representation and specifically brought on record judgments of other High Courts, taking different views, perhaps judgment of the Supreme court could be different and in favour of assessee.

In this case the contentions as raised in return were:

a. Expenditure is revenue expenditure and claimed as such u/s 37

b. In case expenditure is treated as capital expenditure then 1/10^th may be allowed u/s 35D.

c. On reading of paragraph 2 of the reported judgment it seems that one more contention was raised for allowing depreciation. The said paragraph reads as follows:

         “The respondent-assessee is a public limited company and for the assessment year 1994-95, it had filed its return wherein it had claimed revenue expenditure of ₹ 65,47,448/- on advertisement and public issue. However, in the Return of Income, the Company made a claim that if the aforesaid claim cannot be considered as a revenue expenditure then alternatively then the said expenditure may be allowed under Section 35D of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') by way of capitalizing in the plant and machinery obtained.”

Unquote:

Though there is no clarity, however, when there is reference of the plant and machinery obtained, obviously there must be claim for depreciation u/s 32.

Therefore, as per Return of Income, it was admitted position that the issue is contentions and there are different possible ways in which a deduction can be allowed.

Mistake of Assessee:

The assessment year is 1994-95. When Return of Income was filed there was judgment of the Gujarat High Court in the case of Ahmedabad Mfg. & Calico (P) Ltd. (1986) (2) TMI 25 - GUJARAT High Court) in which High Court had taken a view that similar expenses are capital expenditure which was subsequently followed by Alembic Glass Industries Ltd. V. CIT (1992 (9) TMI 49 - GUJARAT High Court). The registered office of the respondent assessee being in the State of Gujarat, the law laid down by the Gujarat High Court was binding. However, assessee made a claim contrary to binding judgment which was in force at the time of filing of return of income. Assessee seems have  not even pointed out any contrary judgment holding such expenses as revenue expenses or other reasons for not following binding judgment and claiming full deduction on some other contentions..

 In fact assessee himself has stated that in case expenses are not allowed as revenue expenses, then 1/10^th may be allowed u/s 35D.

Though at the  time of filing of Return of Income judgments in case of Brooke Bond India Ltd. v. Commissioner of Income Tax, W.B.III, Calcutta - 1997 (2) TMI 11 - SUPREME Court  and Punjab State Industrial Development Corporation Ltd., Chandigarh v. Commissioner of Income Tax, Patiala - 1996 (12) TMI 6 - SUPREME Court were not available, however, for the assessee judgment of Gujarat High Court was binding and must have been followed.

Proper course for assessee:

It would have been proper course for assessee to claim 1/10^th deduction and to make a further claim for consideration by the AO to allow full amount as revenue expenditure, deduction u/s 43B for statutory levies by way of fees paid under the provisions of the Companies Act for amendment in capital clause (which are not necessarily capital expenditure).

Learning from the  history of the case and judgment:

While filing return of income, check computation on any contentious issue. Check if there is any binding precedence against assessee, if so, follow binding precedence in computation and make disallowance and make further claim for consideration of the AO , so that matter can be contested.

Double standard followed by Tax authorities:

It is very unfortunate that tax authorities follow double standards by following or not following binding judgments. If the binding judgment is in favour of revenue, it is followed, even while making prima facie adjustments.

However, when binding judgment is in favour of assessee, it is very likely that this will not be followed merely for reason that revenue may prefer appeal or review petition. Even sometimes judgments of the Supreme Court are not followed, for the reason that a review petition is pending, or facts are different.

Double standard even by CIT(A):

Even CIT(A) are following double standard. About three years ago, generally CIT(A) followed binding precedence and even precedence not binding in his area but being order of superior court was followed and relief was also allowed.

However, in recent times (2-3 years) trend has changed. Author knows cases in which even judgment of Tribunal approved by High Court, which has attained finality, in case of assessee was not followed and the CIT(A) also did not follow the judgment of Tribunal in case of assessee which has also attained finality.

In many cases, binding judgment of the High Court (which is based on judgments of the Supreme Court) is not follows by the AO and CIT(A). Even revision orders are passed contrary to binding precedence.

All these are resulting into high demands being raised, assessee being forced to contest illegal orders passed by AO/ CIT(A)/ CIT.

Tribunal generally follow binding precedence:

Fortunately Tribunal members are by and large following binding precedence. There are few exceptions of some members, who are/ were in habit of deciding issue in favour of revenue and even used not to follow binding precedence in favour of assessee, by merely stating that facts are different.

Rule of judicial discipline:

As per Rule of judicial discipline, as declared by Supreme Court, and High Courts, even order of CIT(A) must be followed by the AO. However, it is not followed in practice. We find even judgment of jurisdictional High Court not being followed. For example, employees PF contribution is not being allowed even if there is a delay of single day in deposit. This is despite that Supreme Court has held that if such amount is deposited before due date u/s 139(1), it should be allowed. Recently Board has also issued a circular/ instruction not to allow such delayed payment because a fresh SLP of revenue has been admitted. 

A case of cess on Green Tea leaf is another example. Tea companies faced disallowance of cess for long period of time in spite of fact that there was no difference of opinion of Calcutta High Court and Guwahati High Court on issue under Income-tax Act, 1961. The litigation for prolonged even before the Supreme Court and in meantime, disallowance by AO, relief by CIT(A)/ Tribunal/ High Court continued and revenue used to prefer appeal before the Supreme Court.  

Suggestion:

In earlier articles author had suggested that a provision to follow order / judgment of higher authority/ court be made with another provision to make rectification in orders based on order/ judgment of further higher authority / Court.

article Published  long ago at 189 CTR Part IV dt. 09.07.2004 titled “PROVISION TO FOLLOW ORDERS OF HIGHER COURTS/ AUTHORITIES AND WIDER SCOPE OF RECTIFICTION FOR SIMPLIFICATION OF PROCEDURES AND REDUCTION OF LITIGATION”, author had suggested that a provision to follow binding precedence and provision to make rectification if binding precedence followed now is reversed, will go a long way in better tax administration and will go a long way in reducing litigation.

Now it is high time that to make business easy, tax administration easy and to reduce litigation such provision must be incorporated in various laws, particularly tax laws.