TMI Blog1994 (6) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... prepared an intimation under section 143(1)(a) of the Act, accepting the income returned based on section 115J of the Act. He attached a sheet called 'Adjustment Explanatory Statement' to this intimation. He noted in this sheet the various adjustments giving reasons for each of such adjustments. The claim of the assessee is that the adjustments so made are not in the nature of prima facie adjustments and therefore, though, the Assessing Officer had stated it as an intimation under section 143(1)(a), it has to be treated as an assessment framed under section 143(3). Accordingly, the claim advanced had been that the Assessing Officer could not subsequently issue a notice under section 143(2) for purposes of framing of the assessment. Therefore, the present assessment order is illegal and should be quashed. The content of the said sheet is therefore reproduced below for the sake of convenience and for appreciating the controversy : Rs. Rs. Income before adjustment of B.F. losses 54,90,346 Add: Disallowances as under : Sales tax --- for which no evidence of payment has been filed. Merely filing of a letter that the same has been paid before the filing of return does not constit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, and after allowing of deductions under sections 80G 80M of the Act, and setting off the brought forward losses, he concluded that the total income of the assessee-company was higher, on which the assessee was liable to pay income-tax, was Rs. 2,68,82,870. 5. The aggrieved assessee challenged the assessment in appeal to the CIT (Appeals)-XII,New Delhi, who had disposed of the same vide his order dated31-12-1993. The assessee had challenged the assessment both on its legality validity and on merits relating to the various additions, treating certain items as incomes as well. 6. The CIT (Appeals), on the claim of illegality and invalidity of the order, considered the following objections of the assessee. First objection was that the intimation dated11-3-1991could not be called an intimation, because, it had travelled beyond the prescription in section 143(1)(a) of the Act and therefore, it had to be construed as an order passed under section 143(3) of the Act. Therefore, the assessment having been framed once, the Act does not permit framing of a second assessment and hence the present order is an illegal one and must be quashed. The second objection was that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessments are framed without calling for the attendance of the assessee, they are so framed, without application of the mind. He also observed that sending of the intimation under sections 143(1)(a) 143(1A) of the Act, is independent of the provisions contained in sub-section (2) to section 143 of the Act. He accordingly had observed that the Assessing Officer could send the notice under section 143(2) even where the intimation had been sent. He accordingly rejected the claim of the appellant on the illegality and invalidity of the assessment and considered the issue on merits. 10. The appellant company has thus come up in appeal before us, challenging the legality and validity of the present assessment and the proceedings thereto. It has also challenged treatment given to certain items of receipts as in the nature of income and certain other items of additions and disallowances. 11. Shri S.L. Batra, the learned counsel for the appellant company, submitted that there had been several decisions of the Tribunal, where the powers of the Assessing Officer under section 143(1)(a) had been considered and the consistent view taken is that prima facie adjustments do not include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. He contended that, in this decision, after considering the circulars of CBDT bearing numbers 549, dated 31-10-1989 581, dated 28-9-1990, it was held that rectification applications or revision petition are not adequate alternative remedies to intimation made under section 143(1)(a) of the Act, which contained various wrong disallowances. He contended that, it was held in this decision that, no prejudice would be caused to the revenue, if they accept the return of the assessee, because it is always open to the Assessing Officer to issue a notice under section 143(2) of the Act and frame an assessment on that basis. 14. Shri Batra submitted that the order, as framed by the Assessing Officer, clearly shows that it is not so made within the meaning of section 143(1)(a) of the Act. He contended that, merely because, the Assessing Officer has styled it as an intimation, its true character does not change, which is that it is an order framed under section 143(3) of the Act, though, it was not preceded by a notice under section 143(2) of the Act. He contended that the order dated11-3-1991, is still effective, because, it has not been cancelled by any superior authority an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equivalent to raising of additional demand of tax. She contended that wherever, the returned income has been the basis for sending of the intimation, though, it might contain certain adjustments, like the one in the instant case, they all are well within the provisions of sections 143(1)(a) and 143(1A) of the Act. 17. She pleaded that the cases relied upon by the assessee are all cases where, consequent to the adjustments made, additional demand of tax was raised on the assessee. Since the result of the adjustments was some tax, the courts had held that such adjustments, that call for additional information, could not have been covered under prima facie adjustments. She referred to the adjustment explanatory sheet and submitted that she would have readily conceded to the claim of the appellant company, had the adjustment been intended to be given effect to, or had been given effect to, by raising of additional demand of tax. She submitted that calculations made for the satisfaction of the Assessing Officer, before issue of the intimation accepting the returned income, under no circumstance could be given the same treatment as the one that has resulted in additional demand of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and the circular of the CBDT bearing number 549 dated31-10-1989. We reproduce below the sections, the memorandum explaining the said provisions and the two circulars of the CBDT, for the sake of convenience and evaluating the controversy, in its true perspective. 21. Section 143(1)(a) ---- Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142,---- (i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under section 156 and all the provisions of this Act shall apply accordingly; and (ii) if any refund is due on the basis of such return, it shall be granted to the assessee: Provided that in computing the tax or interest payable by, or refundable to the assessee, the following adjustments shall be made in the income or loss declared in the return, namely :----- (i) any arithmet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notice issued under sub-section (2), or as soon afterwards as the case may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him on the basis of such an assessment. 25. Memorandum explaining the provisions of sections 143(1) 143(1A) Clause 48 seeks to substitute a new section for the existing section 143 relating to procedure for assessment. Under the existing provisions of the section, after a return of income has been filed, the Income-tax Officer may make an assessment under sub-section (1) without requiring the presence of the assessee or production by him of any evidence in support of the return. Where the assessee objects to such an assessment or where the Income-tax Officer is of the opinion that the assessment so made is incorrect or incomplete, or in a case where the Income-tax Officer does not complete the assessment under sub-section (1), but wants to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice can be served on the assessee only during the financial year in which the return is filed or within six months from the date of filing the return, whichever is later. Sub-section (3) provides that after hearing such evidence as the assessee may produce in response to notice under sub-section (2) and such other evidence as the Assessing Officer may require on specified points and after taking into account all relevant material which the Assessing Officer has gathered, he shall pass an assessment order in writing determining the total income or loss of the assessee and the sum payable by him on the basis of such assessment order. 26. CBDT Circular No. 549, dated31-10-1989 5.1 The new scheme of assessment (new section 143)---- With the number of income-tax assessees continuously increasing, there was an urgent need to reduce the Department's work load by greater reliance on voluntary compliance by the assessees. The Amending Act, 1987, has, therefore, substituted a new section 143 in the Income-tax Act to introduce an entirely new scheme of assessment after a return of income has been filed. The main features of the new scheme are :---- (i) The requirement of passing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting the capital gains, deduction of Rs. 10,000 under section 48(2) is not claimed or claimed less or in excess of this amount. (v) Carried forward speculation loss set off against income from business or profession or against income under any other head. (vi) Loss under any head, other than under the head "Profits and gains from business or profession", carried forward and set off against the current income. (vii) Carried forward loss of business set off against income of current year under other heads. (viii) Old loss of more than eight assessment years set off against the current income, if the information is available in the return or the accompanying documents. (ix) Deduction under section 80C in respect of provident fund contributions or life insurance premia or N. S. C. VI or VII issue not claimed, though the information is available in the document accompanying the return, or claimed at a figure which is less than or is in excess of the permissible amount. (x) Deduction under section 80L not claimed or claimed at a figure which is less than or is in excess of the permissible amount. (xi) Deduction under section 80G not claimed though allowable on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ................................ 5.11 ........................................................................................................ 5.12 Since, under the provisions of sub-section (1) of the new section 143, an assessment is not to be made now, the provisions of sub-sections (2) and (3) have been recast and are entirely different from the old provisions. A notice under sub-section (2), which will be issued in cases picked up for scrutiny, is now issued only to ensure that the assessee has not understated his income or has not computed excessive loss or has not underpaid the tax in any manner while furnishing his return of income. This means that, under the new provisions, in an assessment order passed under section 143(3) in a scrutiny case, neither the income can be assessed at a figure lower than the returned income, nor loss can be given in except what was due on the basis of the returned income, and which would have already been allowed under the provisions of section 143 (1)(a)(ii). 5.13 A proviso to sub-section (2) provides that a notice under the sub-section can be served on the assessee only during the financial year in which the return is furnished or with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... long period. It may further be pointed out that no refund can now be granted on completion of an assessment under the provisions of section 143(3). For this reason also, action under section 143(1)(a)(ii) for issue of a refund on the basis of a return of income or loss must be completed before the assessment order under section 143(3) is passed in that case, as otherwise the provisions of sections 143(1)(a)(ii) and 143(3) would get mixed up and may create confusion and uncertainty. 5.16 From the above discussion, it follows that even in cases selected for scrutiny it is desirable that action under section 143(1)(a) for issue of an intimation for any sum due from the assessee or for issue of a refund due to the assessee on the basis of the return must be completed soon after the filing of the return and in any case before completion of assessment under section 143(3). In fact, it is preferable if action under section 143(1)(a) is completed even before the issue of a notice under section 143(2) in such cases. 5.17 Whether any appeal is provided against and adjustment made under the proviso to section 143(1)(a) or levy of additional income-tax under section 143(1A)---- A direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the increase of the income or in the reduction of the losses. 28. The AO had computed the income with reference to the profits as per profit and loss account of the assessee-company and had made certain disallowances for want of proof, for entertainment expenses and non-allowability of deductions under sections 80G 80M, because, there was no income available after the set off of the brought forward losses. He had then determined the book profit under section 115J of the Act and calculated 30% of it and adopted it as income. He had accordingly shown the income under section 115J in his intimation under section 143(1)(a) of the Act, which was the income as returned by the assessee-company. 29. The AO, though, had carried out certain disallowances in computing the income but had not given effect to them by raising any demand of tax. He had in fact accepted the returned income, though, it was so made by invoking section 115J of the Act. It is an admitted position that, due to the said intimation, no prejudice had been caused to the assessee in the shape of imposing upon it any additional demand of tax because there had been no additions to the returned income. In these circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been introduced, is a presumptive income provision, which is to be invoked in certain circumstances. This is aptly clear from sub-section (1) of that section, which we reproduce below for the sake of facility. Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company other than a company engaged in the business of generation or distribution of electricity, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 but before the 1st day of April, 1991 (hereinafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profits, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. 34. The said section is to be invoked when the income computed under the Act, for and from the assessment year 1988-89, on being compared with thirty per cent of the book profit, is found to be less. Then, the income on which the assessee, would be chargeable to tax, for that assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he primary condition, which could be so shown only when he computes the income under the Act, by applying the various provisions of the Act from sections 28 to 43A, 70 to 74, 80, 80A to 80Z and section 145, etc., after evaluating each and every circumstance and the Act, as would be relevant for each of those sections. It is for this purpose that section 143(2) of the Act has been enacted, which reads, the Assessing Officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice. The memorandum explaining the issuing of such notice, has stated ---- when the Assessing Officer considers it necessary or expedient to verify the correctness or completeness of the return, to ensure that the income has not been understated or the loss declared is not excessive, or the tax has not been underpaid, he shall serve on the assessee a notice. 37. Section 143(2) clearly indicates that, in all situations, where the provisions of sections 143(1)(a) 143(1A) have been applied, the Assessing Officer has not to carry out any action that wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er adjustments like the adjustment of carried forward losses, whether, could be made before deductions as are permitted under Chapter VI-A (like deductions under sections 80G, 80M in the instant case), or after, have been subjected to judicial controversy, indicating that they could not fall within the purview of prima facie adjustments. Likewise, the quantum of deduction permissible with reference to section 80M and especially, when the income is a loss, had also been controversial, that had compelled the CBDT, to issue circular No. 58, dated15-4-1971. By means of this circular, the Board had clarified that deduction under section 80M has to be related to the quantum of dividend included in the gross total income and not with reference to the income that is remaining finally, after set off of the losses. This also indicates that the adjustment as carried out by not allowing deduction under section 80M, by stating that, there remains a nil income, is not in line with the directives of CBDT, and hence, could not be held to be prima facie adjustment. From this point of view, it is clear that the adjustments as made in the adjustment explanatory sheet, which could not have been so mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an authority that is superior to the one that has made the order. 41. The Supreme Court, in Union of India v. T.R. Verma AIR 1957 SC 882, had held that, the quasi-judicial authority, who is required to observe the rules of natural justice, if he does not do so, the order so passed by him would be an invalid order. The rules of natural justice have been evolved through the issuance of a notice under section 143(2) of the Act, followed by allowing the appellant to place his facts, as are called upon by the AO. The AO, having invoked section 115J of the Act without issuing a notice under section 143(2) of the Act, has not followed this rule of natural justice, and therefore, the document dated 11-3-1991 that is titled as an intimation, we are compelled to hold as an order of assessment of income, made without following the rules of natural justice and the mandate of the Act. The Supreme Court in Supdt. (Tech.-I) Central Excise v. Pratap Rai [1978] 114 ITR 231, had held that, orders passed, without following the rules of natural justice, being invalid orders, such orders must be struck down as invalid, and must be restored to the point, at which, the invalidity occurred. 42. The d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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