TMI Blog1995 (3) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... owing footnote was given in the same page containing computation of taxable income--- " During the year the assessee had sold some investments which are in fact pledged with a bank and a company for debts owed by a third party. Though the assessee booked profit on sale of these investments it had no legal rights to enforce the payment for sale of shares as sale was made on the condition that the pledged shares will be released and delivered. Though the company, on the basis of contract of sale has booked profits on sale of these investments, the sale is not complete as the title to the company on these shares is defective. For claiming that the income from sale of above investments is not taxable, we rely on the Supreme Court decision in the case of E.D. Sassoon Co. Ltd v. CIT [1954] 26 ITR 27 where it was held that while considering the question as to whether or not income had accrued to the assessee, it has to be ascertained whether the assessee is vested with a right to claim that amount. " (b) Under section 143(1)(a), the Assessing Officer disallowed the claim of the assessee in this behalf, and by adjusting the aforesaid amount of Rs. 41,24,150 reduced the returned l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s negotiating with City Bank and Godrej Foods Ltd. to release those shares and the shares would be delivered as soon as they were received. Thus, knowing the fact that these shares were pledged with the above concerns, assessee in the first instance accepted the offer of Teletek India Ltd. and purchased those shares, and even entered into agreement with Hyderabad Investment and Financial Consultancy Services (P.) Ltd. for selling those shares at a particular rate and the said company with the full knowledge about the pledging of those shares, accepted the offer of the assessee. Necessary entries with regard to purchase and sale of these shares were made in the books of account of the assessee, and in this entire transaction, the assessee calculated a profit of Rs. 41,24,150 which was credited to the Profit Loss Account of the assessee under the head ' Profit from stock market operation '. Though the net profit has been arrived at in the audited Profit and Loss Account of the assessee, taking the aforesaid profit without any reservation, the net result showing excellent performance in the share business has been highlighted in the Directors' Report; and their share-holders also ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e apparently, while filing the return reduced the total income by an amount of Rs. 41,24,150 on the ground that income from the share dealing would be offered on cash basis. According to the Commissioner (Appeals), this unilateral change of accounting method is not permissible as the assessee was following mercantile system and the accounts of the assessee had been drawn up and audited on that basis, and the assessee cannot exclude any item while filing the return, on the specious plea of change in the method of accounting. The first appellate authority rejected the other contention of the assessee that it had no right on those shares which were yet to be delivered, observing inter alia that the assessee was dealing in shares and for trading activities, it was not necessary that stock in trade should have actually changed the hands, and even a contract to purchase and sale executed both by the buyer and seller would be sufficient for completing the transaction, even without physical delivery of the goods. Since the assessee has taken the shares as stock in trade, he rejected the assessee plea that there was no physical delivery and hence no profit, as irrelevant and unacceptable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 dated 24-8-1994 wherein the scope of prima facie disallowances under section 143(1)(a) of the Income-tax Act, 1961, has been explained, he submitted that the impugned adjustment does not amount to a prima facie adjustment, and as such it could not have been made in an intimation under section 143(1)(a). He placed reliance on the decisions of the Bombay High Court in Khatau Junkar Ltd v. K.S. Pathania [1992] 196 ITR 55; of the Madras Bench of the Tribunal in Amber Electrical Conductors (P.) Ltd v. Dy. CIT [1992] 43 ITD 313; of the Jaipur Bench of Tribunal in Badhar Khan v. Dy. Commissioner [1992] 42 ITD 589; of the Indore Bench of Tribunal in Eicher Motors Ltd v. Dy. CIT [1992] 40 ITD 595; of the Hyderabad Bench of the Tribunal in Anam Machinery Fabricators Ltd. v. ITO [1994] 49 ITD 617; of the Delhi High Court in S.R.E. Charitable Trust v. Union of India [1992] 193 ITR 95; of the Madhya Pradesh High Court in Kamal Textiles v. ITO [1991] 189 ITR 339; and of the Karnataka High Court in Om Trading Co. v. Second ITO [1991] 188 ITR 641. Placing reliance on the decision of the Supreme Court in ED. Sassoon Co. Ltd v. CIT [1954] 26 ITR 27, he submitted that while considering the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right vested in the shares in question and as such the income from the sale of the said shares was not taxable, and also considering the fact that in Form 3CD it has claimed against col. 3 that " There is change in Method of Accounting for Income-tax. ..", the adjustment with regard to profit on the sale of shares in question is not a prima facie adjustment which alone could have been done in an intimation under section 143(1)(a). Since the allowability or otherwise of the assessee's claims in the above two documents, are debatable questions of law, they should have been decided only after making proper enquiry and after affording opportunity of being heard to the assessee, in the course of regular assessment under section 143(3), and as such the adjustment with regard to profit in respect of the shares could not have been made in an intimation under section 143(1) with regard to the emphasis of the departmental authorities on the position in Profit and Loss Account statutorily prepared in the context of the share transactions in question, and the absence of any note in the audit report with regard to the adjustment with regard to the purchase and/or sale of these shares, warranti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either in allowing or in disallowing any deduction.... allowance or relief. Under clause (3) to the proviso noted above, unless the return or the accompanying documents or accounts shows that the deduction claimed is prima lacie inadmissible, such deduction cannot be disallowed at the intimation stage, and if the Income-tax Officer was not satisfied with the claim for deduction, or if he requires any further information or any further evidence in the connection, he is bound to follow the provisions prescribed under section 143(2) of giving notice to the assessee, and it is not open to him to disallow such a claim under section 143(1)(a). 7. The Circular of the Board No. 549 dated 31-10-1989 reported in 182 ITR (Statutes) p. 20, explains the scope of amendment brought about in section 143 by the Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989. In para 5.4 of the said Circular, the prima facie adjustments as contemplated under clause (ii) of proviso to section 143(1)(a) are illustrated, but those adjustments were clarified to be only illustrative and not exhaustive list of prima facie admissible or inadmissible for which adjustments can be made to the returned incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the assessee. Only where it is evident from the return as filed, alongwith the documents in support thereof, that a claim of the assessee is inadmissible can an adjustment under clause (iii) to the first proviso to section 143(1)(a) be made. If proof in support of the claim is not furnished by the assessee then, for lack of proof, no disallowance or adjustment can be unilaterally made. The only option which is open to the Assessing Officer in such a case is to require the assessee to furnish proof. This is also evident from the fact that, except for the documents specified, the assessee is not required to file the entire books of account or other documents, and it is not the law that, in support of a claim made in the return for deduction or non-taxability of a receipt, all the proof available and original documents must be filed alongwith the return. The state of furnishing of the proof is reached as and when proof is demanded by the Assessing Officer on a notice under section 143(2) being issued. If no proof in support of the claim is available with the Assessing Officer on the return, accounts or documents filed by the assessee, he can issue a notice under section 143(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and made prima facie adjustments by way of addition in respect of amounts aggregating to Rs. 33,82,442 shown as payable in balance sheet on account of bonus, EPF, ESI and sales-tax. The additions were made because there was no proof given in the return of payments of these amounts before the due date of filing the return under section 139(1). The ITO made no inquiry about these payments from the assessee before sending the intimation under section 143(1)(a). Assessee's petition under section 154 of the Act seeking rectification of intimation on the ground that the amounts shown as payable, had been paid within the due date specified by law, was rejected by the Assessing Officer, following Board's Circular No. 581 dated 28-9-1990. On appeal, the CIT(A) confirmed the action of the Assessing Officer. On further appeal, inter alia held as follows--- ". . . The idea of sending the intimation to the assessee is that bulk of the assessment work is eliminated or disposed of by such a method and the department is able to concentrate on a few selected cases so as to achieve psychological deterrent results by making correct assessments which can stand the scrutiny of appeals. It is true t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ete as the title to the company on these shares was defective; and that for claiming that the income from sale of above investments is not taxable, it relied on Supreme Court decision in the case of F.D. Sassoon Co. Ltd. wherein it was held that while considering the question as to whether or not income had accrued to the assessee, it had to be ascertained whether the assessee is vested with a right to claim that amount. Thus, the assessee in the footnote to the said computation which is part of the return clarified its position with regard to deduction of this profit of Rs. 41,24,150 from the net prof it as per profit and loss account, and supported its claim for deduction in that behalf by placing reliance on the decision of the Supreme Court in the case of E.D. Sassoon Co. Ltd. Thus, even if according to the Assessing Officer, assessee's claim is patently inadmissible in law and as such the adjustment in that behalf is a prima facie adjustment, since according to, the assessee, its claim for deduction is allowable in view of the decision of the Supreme Court in the case of E.D. Sassoon Co. Ltd., it remains to be a point on which two opinions are possible with regard to its ..... X X X X Extracts X X X X X X X X Extracts X X X X
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