TMI Blog1993 (11) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... 5J were in force. In accordance with the provisions of the said section if there are book profits but not assessable profits, the assessee should pay taxes on notional income calculated at 30% of the book profits. In pursuance of the provisions of section 115J, the assessee had returned a sum of Rs. 2,91,090 as its income under section 115J. We are not now concerned with the computation of profits under section 115J and the controversy is only in respect of calculation of profits under the provisions of Income-tax Act (other than 115J). 3. According to the assessee, the loss for the year as per Income-tax Act is as under: Income before deduction of carry forward losses Rs. 48,16,112 Less : Past Year's losses to be set off Rs. 50,72,382 ------------- Loss for the year Rs. 2,56,270 ------------- Since there was loss incurred, 30% of the book profits under section 115J was declared at Rs. 2,91,090. The assessee filed its return on 28-12-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------- Additional tax leviable on Rs. 51,42,188 5,93,923 Less: Additional tax levied in the intimation 8,062 ------------- Additional tax levied under section 154 5,85,861 ------------- 4. Against levy of additional tax under section 154 amounting to Rs. 5,85,861, an appeal was filed before the learned Commissioner of Income-tax (Appeals), Visakhapatnam, who by his impugned orders uphold the levy of additional tax but modified the quantum to Rs. 5,30,702. Being aggrieved, the assessee-appellant filed the present appeal challenging the correctness of the order passed under section 154 levying additional tax of Rs. 5,30,702. It was submitted for the assessee-company that it had been receiving incentive bonus from the Government for carrying on the business of exports in some of its products. The sum received represent the following nature of items: (i) Cash compensatory support (ii) Excise Duty rebate (iii) Duty drawback ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------------------------------------------- 1984-85 4,14,630 (loss) - 4,14,630 1985-86 21,69,205 (loss) 4,14,630 25,83,835 1986-87 84,00,717 (loss) 25,83,835 1,09,84,652 1987-88 2,88,494 (income) 1,13,99,176 1,11,10,682 1988-89 60,38,300 (income) 1,11,10,682 50,72,382 -------------------------------------------------------------------------------- Loss brought forward is shown in excess by mistake Rs. 4,14,630. By the date of filing the return for assessment year 1989-90, it remained the contention of the assessee that these items did not constitute the income and its income for the past years will have to be recalculated ignoring these items as income. As a result of the Income-tax Officer completing the assessments of past years treating the above items as income, the loss to be carried forward stood completely wiped out. As already stated, the assessments were not accepted and the assessee filed appeals against the inclusion of these items as income and they were pendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of income is always filed based on the claim of the assessee. It is up to the Income-tax Officer to accept or reject the claim in accordance with law. There is no restriction placed by the Act on any assessee that if the claim is not likely to be allowed by the Assessing Officer, such claim should not be made in the return of income. On the contrary, a return is filed based on the assessee's understanding of the factual and legal position and not on the basis of likely understanding of the Assessing Officer. If the statute itself forbade for making any claim the position would have been different. If any claim is made contrary to the express language used in the stature then prima facie adjustment falling under clause (iii) to the proviso to section 143(1)(a) could be made since apparently no discussion or debate is permissible. Section 72 is the section under which carry forward of losses is permissible. Section 72(1) requires that the same business should be carried on before loss is allowed to be set off. If there is any change in business activity or the business is stopped, the loss cannot be carried forward. So also the loss cannot be carried forward beyond the period of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Out of the two possible views of interpretation, the preferable view would be that since the return essentially represents the claim of the assessee or what his income is, it is open to the assessee to make the claim consistent with the stand taken by him in the past years. The statute does not, in the humble opinion of the assessee forbid his right to claim set off of loss if quantification is pending consideration in appeal proceedings. It is next contended that appeal is only a continuation of assessment proceedings. In this connection the attention of the Tribunal is drawn to the Calcutta High Court's decision in CIT v. Bengal Card Board Industries Printers (P.) Ltd. [1989] 176 ITR 193. The Hon'ble Calcutta High Court held in last para at page 197 that an appeal is in continuation of original proceedings. So also the attention of the Tribunal is invited to the decision of the Allahabad High Court in J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864 in which, inter alia, it was held as follows at page 881: "A decision liable to appeal may be final until the appeal is not preferred but once an appeal is filed the decision loses its character of finality and become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imation thereof. Even if there is such intimation and the assessee had filed an appeal against such quantification or intimation of loss, the assessee is entitled to claim carry forward and set off of losses in his subsequent year's return in accordance with the claim which is pending adjudication. It was also contended for the assessee that it would be essential to decide whether the losses in any year can be carried forward to the following year and set off as claimed by the assessee is a matter which is to be determined by the Income-tax Officer who deals with the assessment of the subsequent year. A decision recorded by the Income-tax Officer in the earlier years is not binding on an assessee and in this connection the Hon'ble Supreme Court's decision in CIT v. Manmohan Das [1966] 59 ITR 699 was cited and at page 700 in a portion of the headnote the following is what is found : "Whether the loss in any year may be carried forward to the following year and set off against the profits and gains of the subsequent year under section 24(2) has to be determined by the ITO who deals with the assessment of the subsequent year. A decision recorded by the Income-tax Officer who compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under clause (ii) of the proviso to section 143(1)(a), any loss carried forward, deduction, allowance or relief has to be allowed on the basis of the information available in such return or accounts or documents accompanying it. Similarly under clause (iii) of the proviso, to disallow any deduction, allowance or relief claimed, such deduction, allowance or relief must be such as is on the basis of the information available in the return, accounts or documents, prima facie, inadmissible. The Income-tax Officer, therefore, has no power to go beyond or behind the return, accounts or documents, either in allowing or in disallowing any such deduction, allowance or relief. Under clause (iii) to the proviso, unless the return or the accompanying documents or accounts shows that the deduction claimed is prima facie inadmissible, such deduction cannot be disallowed at the intimation stage. If the Income-tax Officer is not satisfied with the claim for deduction, or if he requires any further information or any further evidence in that connection, he is bound to follow the procedure prescribed under section 143(2) of giving a notice to the assessee. It is not open to him to disallow such a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eight assessment years set off against the current business income, if the information is available in the return of the accompanying documents. It may be mentioned that the above is not an exhustive, but only an illustrative, list of prima facie admissibles or inadmissibles for which adjustments can be made to the returned income or loss." Our attention also is drawn to some Tribunal decisions on the question as to what constitute prima facie adjustments. Our attention is drawn to the decision of the Madras Bench in Amber Electrical Conductors (P.) Ltd. v. Dy. CIT [1992] 43 ITD 313 in which it was held that where a particular matter requires an enquiry for coming to a decision, the said adjustment cannot be termed as a prima facie adjustment. Hence, in the first place before the adjustment is made the Assessing Officer should make conscious exercise of finding out whether an enquiry is necessary. Next our attention is also drawn to the decision of the Jaipur Bench in Badhar Khan v. Dy. CIT [1992] 42 ITD 589 in which it is stated that where there is a substantial point of dispute it ceases to be a prima facie adjustment. Next the decision of the Indore Bench in Eicher Motors L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owers the Assessing Officer to send intimation even after completion of assessment. Sub-section (1A) enables Assessing Officer to levy additional tax. Clause (b) of sub-section (1) of section 143 as far it is relevant for our purpose reads as follows: "(b) Where as a result of an order made under sub-section(3) of this section................ there is any variation to the carry forward loss, deduction, allowance or relief claimed in the return, and as a result of which (i) if any tax or interest is found due 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 Clause (b) of sub-section (1A) is also relevant and as far as it is relevant for our purpose reads as follows : "(1A) Where as a result of the adjustments made under the first proviso to clause (a) of sub-section (1)--- (i) the income declared by any person in the return is increased; or (ii) the loss declared by such person in the return is reduced or is converted into income, the Assessing Officer shall,--- (A) (B) is a case where the los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (1A) of section 143 it is stated that the said clause is applicable only where as a result of an order under section 143(3) additional tax payable has been increased or reduced in comparison to the income determined in the earlier intimation. Since in the present case the income both in the intimation and the assessment order is one and the same, the provisions of section 143(1A) clause (8) are not attracted. It is argued that in the whole provision of section 143 there is no provision to rectify the original intimation after completion of assessment. However, in this case the Assessing Officer had rectified the original intimation even after completion of assessment, a power which does not exist in him under the provisions of the Act. Once a regular assessment is made intimation ceases to have any validity and gets merged with the order of assessment. Since the provisions of the Act do not empower the Assessing Officer he is forbidden from passing any order under section 154 and in the present case, there is no legal sanction in his order dated 25-9-1991 and it deserves to be annulled. 10. Levy of additional tax is intended to act as a deterrent in lieu of penalty fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpayer. The Court/Tribunal went to the extent of construing words in a statute even by making some violation to the language used. The decision of the Hon'ble Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597 and another decision of the Hon'ble Supreme Court in State of Tamil Nadu v. Kodaikanal Motor Union (P.) Ltd. [1986] 62 STC 272 were cited as authorities in support of the said proposition. The above two authorities give power to interpret the law based upon the purpose for which the provision is inserted in the statute. Rectificatory order passed under section 154 dated 25-9-1991 is not tenable and cannot be sustained in law. Once there is controversy on the scope of the adjustment such adjustment cannot be admitted at all as it ceases to be prima facie adjustment and consequently levy of additional tax in respect of such adjustment will not arise for consideration. 13. As against these contentions, the Departmental Representative also filed written submissions which are made part of the record. In listing out the reason for passing the rectificatory order under section 154 dated 25-9-1991, firstly it was stated that instead of taking the returned income at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. If the assessee has not received any intimation about the quantification of loss as required under section 158, then the assessee has a right to claim it in accordance with law. However, in the present case the assessee was served with assessment order much before filing of the return of income for 1989-90 and as per the assessment order, there was no loss and on the other hand, loss was converted into income. 15. With regard to the assessee's contention that it is agitating determination of loss before the appellate authority and as such it was entitled to claim the loss in the return, it is submitted that as per provisions of law, if the assessee succeeds in appeals, the loss will be automatically set off by rectifying the later year's assessments. In this regard attention is invited to page 2326 of Chaturvedi Pithisaria, Vol. II, Fourth Edition under the heading "Department's duty to set off", At the said page and under the said heading the learned authors stated the following: " Department's duty to set off.--- The assessee has a statutory right and the Assessing Officer has a corresponding duty to set off the loss carried forward is, later, allowed in appellate or rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer took it at a positive figure of Rs. 48,16,112. This is clearly a mistake apparent from records. Had the Assessing Officer taken the returns income as loss of Rs. 2,56,270 after the adjustment as per the original intimation under section 143(1)(a), the total income after the adjustment in the original intimation would have been loss of Rs. 1,86,464. Thus the loss would have been reduced by Rs. 69,806 being the cash compensatory support and additional cash compensation that were held to be taxable basing on the return of income itself. 18. From the above discussion it can be seen that the Assessing Officer did not commit the mistake while rectifying the original intimation under section 143(1)(a) it would have been a loss of Rs. 1,86,464 as against the loss claimed of Rs. 2,56,270. Still, the Assessing Officer would have levied the additional tax of Rs. 8,062 on this as per the provisions of law. In view of this correct picture, the assessee's contention that there was no difference between the total income after adjustment in the original intimation under section 143(1)(a) and the assessment order under section 143(3) does not hold good. The correct figure that should h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artment did not touch this aspect in its arguments and it was carefully avoided. In the Department's arguments, they have invited the attention of the Tribunal to page 3825 Vol. III of Chaturvedi Pithisaria's Income-tax Law, Fourth Edition. But it is not shown which part of the passage is relevant and relied upon. In the same para the decision of the Bombay High Court in All India Groundnut Syndicate Ltd.'s case also figured and it is not stated anywhere that the decision has been overruled by the Supreme Court or was dissented from by other High Courts. In such circumstances, the assessee is unable to understand where and how the appellant had misquoted the decision. Perhaps, the learned Departmental Representative wanted to rely upon the decision of the Bombay High Court in B.B. Iranee v. CIT [1963] 50 ITR 366 affirmed, B.B. Iranee v. CIT [1966] 60 ITR 437 (SC). In the Bombay High Court's decision, the following para at page 377 is relevant: "As regards the loss alleged to have been suffered in and prior to 1941, we would content ourselves by confining that there was no determination of such loss anywhere. Secondly, it is manifest that the business at that time was carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not point out that where the losses are set off in a return which are not accepted in the past assessments irrespective of appeals pending over them, should be added back as prima facie adjustments. 21. In the Department's submissions, it was stated that there is duty on the Department to set off correct losses as and when an assessee succeeds in appeals and, therefore, the assessee has no right to claim any loss negatived by the Assessing Officer although pending in appeal. The question considered here is the right of the assessee and not the duty of the Department. There is no prohibition in the Income-tax Act that the assessee has no such right and that duty on the part of the Department does not deny the right of the assessee to claim such loss. The matter would have been altogether different if the Statute itself had prescribed that losses which are pending items in appeals cannot be claimed by a taxpayer. There is no such restriction contained in the Income-tax Act as on date. Hence, the assessee is entitled to claim such loss. It cannot be denied that the claim of losses made by the assessee is bona fide. Actually if the Income-tax Officer followed the Tribunal's decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act. In this case, the income under intimation and the income in the assessment order under section 143(3) is one and the same. Once an assessment is completed, the Officer loses his power to rectify the intimation in any manner except for the limited purpose of varying the additional tax under section 143(1)(b). The condition for varying the additional tax is that there should be a change in the amount of income between what was originally taken in the intimation and the amount of income assessed. If there is no change in the amount of income clause (b) to section 143(1A) cannot be pressed Into service. It is submitted that subsequent rectification levying additional tax is bad and cannot be justified on any ground. The fact that the claim before the Commissioner (Appeals) for assessment year 1988-89 was not pressed as disclosed under the order dated 15-3-1991, a copy of which is filed by the Revenue cannot lead to the result that the claim made by the assessee before the Commissioner (Appeals) is frivolous or made without rhyme or reason. 22. Thus after considering the arguments on both sides, the arguments advanced on behalf of the assessee are found to be more accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be seen that both at the time of filing the IT return by the assessee for assessment year 1989-90 or by the date when an intimation was sent to him on 28-2-1990 Finance Act, 1990 was not even introduced in the Lok Sabha. Sub-section (iiia) to section 28 was inserted with retrospective effect from 1-4-1962. Sub-section (iiib) was inserted in the said section with retrospective effect from 1-4-1967 and sub-section (iiic) was inserted with retrospective effect from 1-4-1972. Till the retrospective amendment is brought out into section 28, the question whether cash compensatory support, excise duty rebate, duty drawback, sale proceeds of REPs are actually capital receipts or revenue receipts is a highly debatable issue and there is strong divergence of opinion in this regard even among High Courts. That is why the Legislature had to bring about a retrospective amendment to do away with the controversy and pronounce the last word on the subject. So till the last word on the subject was pronounced by the Legislature itself by introducing an amendment in section 28 which came to be passed much after 19-3-1990 they are highly debatable issues. The income-tax return was filed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional tax levied on Rs. 69,806 also there was no change. It remains at Rs. 8,062 both in the intimation as well as in the assessment. The Department purported to have issued notices under section 154 thrice, i.e., on 26-7-1990, 28-8-1990 and 2-5-1991 whereas the assessee filed petition under section 154 twice on 23-5-1990 and 5-7-1990. With reference to these notices and petitions filed under section 154 only one order of rectification was passed on 19-9-1991. As to the question when was the mistake found out by the Department for the first time, it would appear that it had realised the mistake on 26-7-1990, i.e., when the first notice under section 154 was issued. The Revenue was not able to place before us any circumstance under which it had realised the mistake which constituted the reasons for issuing notice under section 154 for the first time on 26-7-1990. Therefore, we feel it difficult to accept the contention of the Department that by sheer mistake committed by the Income-tax Officer an intimation was first sent and in order to rectify that mistake a series of notices were sent. Therefore, we hold that the intimation dated 28-2-1990 was conscious order passed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly disallowance of losses and the scope of CBDT's Circular No. 549 dated 31-10-1989 was exhaustively discussed by the Bombay High Court in Khatau Junkar Ltd.'s case. In the head note of the decision at pages 58 and 59, the ratio of the decision with regard to this aspect is found noted as follows : "In connection with this new provision, the Central Board of Direct Taxes issued Circular No. 549 dated 31-10-1989. The circular points out, inter alia, that under the new scheme of assessment, the requirement of passing an assessment order in all cases where returns of income are filed, has been dispensed with and the issue of an acknowledgement slip to the assessee will be the end of the matter, if he had correctly paid tax and interest, if any, due on the basis of the return. But, if, on the basis of the return, any amount is found due from the assessee, it can be recovered and if any refund is due to the assessee, it can be granted without passing an assessment order. The assessment order will be passed only in a very limited number of cases selected for scrutiny. While dealing with the adjustments to be made in the income or loss declared in the return, the circular provides in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1989-90 if it is the case of the revenue that it appeared that the whole claim made by the assessee for carry forward of loss of Rs. 50,72,382 is prima facie disallowable then disallowance of such loss towards prima facie adjustment is not justified on the part of the Income-tax Officer since it is not warranted under law or he is not empowered to do so under law. Here itself, another question may be considered on which the parties advanced arguments. The question is whether carry forward of loss of the earlier years can be allowed only if such right is recognised by the Income-tax Officer or by any of the appellate authorities. This specific stand was taken by the Revenue whereas it was the contention of the assessee that even though the right to claim set off of past losses for earlier years was not recognised or upheld by the Income-tax Officer or by any of the appellate authorities as yet, and even if such claim is merely pending before the lower appellate authorities, the assessee can put forward the claim to set off of past years' losses from the current year's profits. It is also the contention of the assessee that the issue whether the loss in any year should be carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognised the carry forward cannot be ordered Is wrong under law and, therefore, rejected. 25. Another contention of the assessee is that the claim to set off of losses of earlier years was pending in the appeal proceedings and since the appeal proceedings are only continuation of assessment proceedings, no finality was reached in the assessments of earlier years and all assessments of earlier years were deemed to be continuing and in support of this contention the assessee had cited J.K. Synthetics Ltd.'s case. Even by virtue of this legal position, the quantification of loss of earlier years did not reach any finality and it should be deemed to be still in continuation. Therefore, for this reason also, the Income-tax Officer while considering the assessment proceedings for 1989-90, should consider the allowability or otherwise of the claim for set off of past years' losses from the current year's income. Another contention is that after regular assessment order under section 143(3) was passed, the earlier intimation under section 143(1)(a) would be merged into that order and would lose its identity thereafter. The contention of the Revenue on the other hand, is that despite p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 25-9-1991 would warrant the invocation of section 143(1)(b). Neither the earlier assessment was completed subsequent to sending of intimation nor was there any variation in the carry forward loss, deduction, allowance or relief as a result of such assessment of earlier years. Thus we hold that section 143(1)(b) also does not justify the rectification under section 154 on 29-9-1991. 26. We have already set out the reasons for which the rectification under section 154 was taken up and the impugned order dated 25-9-1991 was passed by the Assessing Officer. The question is whether the reasons constitute valid grounds for rectification. In this connection we have to observe without fear of contradiction that the Income-tax Officer had gone into the merits of the claim about disallowance of loss. Whether that can be done or not is the question. In the Bombay High Court's decision in Khatau Junkar Ltd.'s case it was held in the headnote at page 61 as follows : "Held, (i) that, in the present case, when by a unilateral act, without giving any hearing to the assessee, the Income-tax Officer had disallowed the claim by going beyond the return and the documents annexed to it, the remed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g into the returns or to the profit and loss account or back records of earlier years, it cannot be said that the assessee is not entitled to set off of unabsorbed losses of Rs. 50,72,382. Therefore, we have to hold that the intimation dated 28-2-1990 is ultra vires the powers of the Income-tax Officer. We also agree with the contention of the assessee that what the Assessing Officer cannot do by invoking the provisions to section 143(1)(a) while sending the intimation cannot be available to him at the time of rectification under section 154. When he does not have powers to disallow the loss at the time of intimation under section 143(1)(a) he cannot get such powers which are not there while invoking the provisions under section 154. There is no warrant for us to decide generally whether the intimation under section 143(1)(a) can be rectified or not but from the facts and circumstances of this case, we are surely of the opinion that the rectification dated 25-9-1991 is not justified and is illegal and therefore, cannot be supported. We also agree with the contention of the assessee that after the regular assessment under section 143(3) is passed, the intimation under section 143(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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