TMI Blog1982 (7) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... vious years, as the case may be, as exceed the statutory deduction, at the rate, or rates specified in the Third Schedule to the Surtax Act. Under cl. (5) of s. 2, the expression " chargeable profits " means the total income of an assessee computed tinder the I.T. Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule to the Surtax Act. Under cl. (8) of the said s. 2, as it stood at the relevant time, the expression " statutory deduction " meant an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule to the Surtax Act, or an amount of two hundred thousand rupees, whichever was greater. Under s. 5(1), every company whose chargeable profits assessable tinder the Surtax Act exceeded during the previous year the amount of statutory deduction is bound to furnish a return of the chargeable profits of the company during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed, before the 30th day of September of the assessment year. The expression " assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of such assessment. " " 7. Provisional assessment.-(1) The Income-tax Officer, before proceeding to make an assessment under section 6 (in this section referred to as the regular assessment) may, at any time after the expiry of the period allowed under sub-section (1) or sub-section (2) of section 5 for the furnishing of the return and whether the return has or has not been furnished, proceed to make in a summary manner a provisional assessment of the chargeable profits and the amount of the surtax payable thereon. (2) Before making such provisional assessment, the Income-tax Officer shall give notice in the prescribed form to the person on whom the provisional assessment is to be made of his intention to do so, and shall with the notice forward a statement of the amount of the proposed assessment, and the said person shall be entitled to deliver to the Income-tax Officer at any time within fourteen days of the service of the said notice a statement of his objections, if any, to the amount of the proposed assessment. (3) On expiry of the said fourteen days from the date of service of the notice referred to in sub-section (2), or earlier, if the assessee agrees to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20, 1975. The present petition was filed on February 24, 1975, seeking to set aside the said order of provisional assessment and the said notice of demand. The petition was admitted and an interim stay of the provisional order, of assessment and its recovery was granted by this court, and the respondents were restrained from taking any steps in pursuance of either the impugned order of provisional assessment, or the said, impugned notice. Nevertheless, Siemens paid a sum of Rs. 6,74,912 by way of surtax payable according to their return out of the sum of Rs. 12,89,844 demanded from them. The notice of the proposed provisional assessment dated December 20,1974, and the statement annexed thereto do not show why the ITO wanted to reduce the capital computation made by Siemens in their re turn, but it appears that by comparing the statement annexed to the said notice and the return filed by them, Siemens were able to understand what was proposed to be done, and had filed their objections accordingly. In order to understand what was in fact done by the ITO and to test the validity of his action it is first necessary to see the provisions of the relevant Schedules to the Surtax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egate of the amounts, as on the first day of the previous year relevant to the assessment year, of (i) its paid-up share capital; (ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act,1961 (43 of 1961); (iii)its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961); ...... Explanation.-For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'RESERVES AND SURPLUS' or of any item under the heading 'CURRENT LIABILITIES AND PROVISIONS' in the column relating to 'LIABILITIES' in the 'FORM OF BALANCE-SHEET' given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gen. reserve 3,33,42,202 Less: Dividend 43,20,000 ----------- 2,90,22,202 Long-term loan 3,17,71,719 Debentures 2,00,00,000 ------------ 11,71,91,199 Proportionate decrease in capital 7,39,758 ------------ 11,64,51,441 Less : Under rule 4 in respect of Ch. VI-A deductions 3472575 -------- x 11,64,51,441 = 1,26,29,182 3201999 ------------ 10,38,22,259 10% of Not chargeable profits 1,03,82,226 ----------- 49,59,376 " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's return is not being accepted. Bearing particularly in mind the fact that there is no right to a personal hearing before a provisional assessment is made and thus no opportunity to the assessee to remove any misapprehension which an ITO might have in his mind and of which in the absence of the grounds being stated in the notice the assessee would be ignorant, the principles of natural justice and the audi alteram partem rule require that the grounds upon which the assessee's return or part of his return is not intended to be accepted should be communicated to the assessee. If the prescribed form of notice does not expressly require such grounds to be stated, it also does not expressly exclude this requirement. In the statement of the amount of the proposed assessment attached to the show-cause notice the grounds should be set out, otherwise in some cases grave prejudice would be caused to an assessee. In fact, as would be set out later, by reason of the omission to set out the grounds in the show-cause notice in the present case, prejudice has been caused to Siemens by their not setting out certain relevant facts which they otherwise would certainly have done had the grounds for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was non-application of mind. Judicial and quasi-judicial authorities, as a rule, take papers home and work over them during, what for them is misnamed, free time and holidays. There might have been some substance in this contention were the order not a speaking order. It, however, would not be correct to label the order in question in this case as a non-speaking order. It undoubtedly is a very brief order. The provisional assessment made by it is the very same assessment as was proposed in the showcause notice. But, however brief the impugned order may be, it refers to the various objections raised by Siemens in their letter dated December 27, 1974, and deals with each of them, albeit tersely, but, however tersely, the objections have been dealt with and rejected. The order does show that the ITO had taken into account the objections of Siemens and has given his reasons for rejecting them. Whether these reasons are correct and whether the ITO was entitled to make the provisional assessment, which he did, are, however, different matters and will be considered later in the course of this judgment. It is equally not possible to accept the contention of Siemens that provisional ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, is whether these provisions can be called into play so far as a provisional assessment is concerned. The very expression " provisional assessment " shows that it is not a final or a regular assessment but one to be made before the regular assessment is made. As mentioned earlier, s. 7(1) itself expressly states that it can be made at any time after the period for the furnishing of return has expired, and this provision, therefore, excludes any requirement that the total income must first be computed under the I.T. Act. It is also pertinent to bear in mind that a return for chargeable profits is to be in Form No. 1 to the Surtax Rules. Part II of the said Form No. 1 is headed Computation of Chargeable Profits, and col. 1 of Pt. II is headed "Total income computed in accordance with the provisions of the I.T. Act, 1961 ". If the arguments advanced on behalf of the petitioners were correct, it would mean that even a return of chargeable profits, under s. 5 of the Surtax Act cannot be made unless and until the total income is first assessed under the I.T. Act. Such a construction would be contrary to the provisions of s. 5(1) which require a return of the chargeable profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble because, under sub-s. (3) of s. 7, a provisional assessment is to be made on the expiry of fourteen days from the date of service of the notice. Thus, the only opportunity which the assessee has is to submit his objections to the proposed assessment, and if the assessee does submit them, the ITO is to take them into account. (3) Under sub-s. (4) of s. 7, there is no right of appeal against a provisional assessment. (4) There is no time-limit provided under the Surtax Act, as there is under the Income-tax Act, for making a regular assessment. The amount payable under a provisional assessment is to be paid within thirty-five days from the date of service of the notice of demand, and as the provisions of ss. 220(2) and 221 of the I.T. Act have been made applicable to the Surtax Act, an assessee committing default in payment of the amount of the provisional assessment becomes liable to pay interest as also becomes liable to imposition of penalty. The result is that the amount of provisional surtax assessed would continue to be at the disposal of the Government until such time as the ITO chooses to make a regular assessment. (5) If as a result of a regular assessment the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment, the excess shall be refunded to the assessee. (6) Nothing done or suffered by reason or in consequence of any provisional assessment made under this section shall prejudice the determination, on the merits, of any issue which may arise in the course of the regular assessment. (7) There shall be no right of appeal against a provisional assessment made under sub-section (1). In Burmah Shell Refineries Ltd. v. G. B. Chand, ITO [1966] 61 ITR 493, this High Court pointed out the distinctive features of a provisional assessment made under the I.T. Act, as opposed to a regular assessment. It laid emphasis on the fact that a provisional assessment was made ex parte and without an opportunity to the assessee of being heard and that there was no right of appeal against an order of provisional assessment. It further emphasized that a provisional assessment was to be made on the basis of the return filed by the assessee. The High Court held that the correctness or otherwise of the return as to the factual position stated therein could not be gone into or inquired into at that stage and that it was on this basis that the assessment had to be made. According to the High Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able income, subject to the benefit of the allowances under sub section (2). The section does not permit an enquiry to be made whether the total income returned by the assessee exceeds the amount admitted by him, nor whether the allowances or deductions claimed are admissible. If there be a discrepancy between the return made and the accounts and documents accompanying the return, the Income-tax Officer may ask the assessee to explain the discrepancy, but he must make a provisional assessment on the basis of the return initially made or clarified and the accounts and documents filed. He cannot make a provisional assessment by holding that certain claims made by the assessee are in law unjustified, If it transpires that the assessee has without reasonable cause concealed particulars of his income or has furnished inaccurate particulars of his income, it may be open to the Income-tax Officer to impose penalty upon him after the regular assessment is completed. But it is not open to him to determine whether there has been any concealment of particulars of income or to decide whether claims which have been made are unwarranted. The language used in s. 141 of the I.T. Act, however, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different. In the case of provisional assessment, the object is to accelerate and expedite the collection of tax without holding it up until a regular assessment is made. The object of a regular assessment is to determine the liability to tax of the assessee and to quantify that liability. It is for this reason that while provisional assessment is to be made in a summary manner, for making a regular assessment, an opportunity of hearing has to be given to the assessee as also an opportunity to produce his evidence. In my opinion, when the Supreme Court in the case of Jaipur Udyog Ltd. [1969] 71 ITR 799, observed that " if it be granted that the Income-tax Officer has jurisdiction to hold an enquiry into disputed matters, the expression 'provisional assessment' may lose all significance ", its observation was not confined merely to a provisional assessment made under s. 141 of the I.T. Act but was an observation made with respect to provisional assessments which are made in a summary manner and was made because of the very nature of a provisional assessment and the purpose for which it is made. It is also well settled that a summary procedure is not intended for determination of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference or distinction between the cases decided and the case, under consideration and cannot be decided in a provisional assessment. According to Mr. Joshi, so far as questions of law are concerned, the ITO was only bound to follow the decision of the Supreme Court directly on the point, and so far as decisions of the High Courts were concerned, only of the High Court within whose jurisdiction he is, unless an appeal against that decision was pending in the Supreme Court, or a special leave application against the judgment in that decision was pending in the Supreme Court, but he was not bound by decisions of other High Courts. Mr. Joshi further submitted that the ITO was equally not bound by the decisions of the Income-tax Appellate Tribunal because these decisions do not lay down the law. The submission that an ITO is not bound by the decision of a High Court within whose jurisdiction he is, if an appeal against that decision is pending in the Supreme Court, or a special leave application is pending in the Supreme Court against that judgment, cannot be accepted. Merely because an appeal has been filed or a special leave application is pending against it does not denude a deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow previous decisions of the County Court judge, even though an appeal lies from the Registrar to the Judge. According to Salmond, courts of inferior jurisdiction are bound only by decisions of courts of superior jurisdiction, as for example, the High Court, the Court of Appeal and House of Lords. I am here, however, not, concerned with the question of the theory of precedents. The question is of the extent and nature of the powers of an ITO while making a provisional assessment in a summary manner. If the Tribunal has decided a case in a particular way and the same point arises in provisional assessment, it is implicit from the nature of a provisional assessment that the ITO should not take a different view, because there is no opportunity to the assessee to convince the ITO why he should not take a view different from that taken by the Tribunal and no remedy is open to him to correct the view taken by the ITO. Whether what has been stated in Salmond on Jurisprudence would apply to regular assessments is not a question with which I am concerned, but it is not open to the ITO while making a provisional assessment to depart from the view taken by the Tribunal and strike out on a lin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat return, in whole or in part, or to refuse to accept the factual position shown therein or the legal position as then prevailing. So far as the legal position is concerned, the ITO would be bound by a decision of the Supreme Court as also by a decision of the High Court of the State within whose jurisdiction he is, irrespective of the pendency of any appeal or special leave application against that judgment. He would equally be bound by a decision of another High Court on the point, because not to follow that decision would be to cause grave prejudice to the assessee. Where there is a conflict between different High Courts, he must follow the decision of the High Court within whose jurisdiction he is, but if the conflict is between decisions of other High Courts, he must take the view which is in favour of the assessee and not against him. Similarly, if the Income-tax Appellate Tribunal has decided a point in favour of the assessee, he cannot ignore that decision and take a contrary view, because that would equally prejudice the assessee. He can, however, reject claims which are clearly and indisputably untenable and about which a different view is not rationally possible. For i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 12, 1972, and S.T.A. No. 163/Bom/73-74-ITO v. Parke Davis (India) Ltd., decided on September 11, 1974. The first two of the above four were appeals under the Super Profits Tax Act, 1963, while the last two were cases under the Surtax Act. In view of the above decisions, it was not open to the ITO to disallow the above two items and in doing so he exceeded his jurisdiction. The only argument which was sought to be advanced in support of the action of the ITO was that the facts upon which Siemens relied were not set out in their said letter of objections dated December 27, 1974. This argument is without any merit. As mentioned earlier, the showcause notice did not set out any reasons why certain items were not being taken into account. Had these reasons been set out, Siemens would have known the grounds upon which the ITO proposed to proceed, and would have set out these facts. It may also be mentioned that along with their return Siemens have filed their balance-sheet for the year ended September 30, 1972, and the said balance-sheet bears out the case of Siemens. The next argument which was advanced by Mr. Joshi to support the action of the ITO was that the Explanation to r. 1 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Second Schedule to the Surtax Act made any difference was a matter of controversy and debate as pointed out earlier, and in view of the limitations which hedge around a provisional assessment by virtue of its very nature, the ITO ought not to have taken the view which he did. It may be mentioned that recently in several appeals, disposed of by the Supreme Court by a common judgment reported as Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, 573, in which one of the questions was whether a provision for taxation could be considered as " other reserves " within the meaning of rule I of the Second Schedule to the Super Profits Tax Act or r. 1 of the Second Schedule to the Surtax Act, the Supreme Court has held that if a provision for a known or existing liability is made in excess of the amount that would be reasonably necessary for the purpose, the excess would have to be treated as a reserve and, therefore, would be includible in the capital computation. The next item is with respect to the provision for dividend. According to the note in the balance-sheet, the directors had recommended dividend at the rate of 18% free of tax, amounting to Rs. 43,20,000, which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be charged " in accordance with, and subject to the provisions of this Act (that is, the I.T. Act) in respect of the total income of the previous year or previous years, as the case may be, of every person ". Section 5(1) of the I.T. Act provides as follows: 5. Scope of total income.-(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year We are not concerned with the proviso to that sub-section. Section 10 is material for the present purpose. The marginal heading of that section is " Incomes not included in total income ". The opening words of the section are "In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included ". The different clauses of s. 10 then set out the incomes which are not includible in the total income. None of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions taken a view which upheld the contention of Siemens. These decisions are S.T.A. No. 215 (Bom) of 1973-74-Inarco Ltd. v. ITO, S.T.A. No. 24 (Bom) of 1970-71 ITO v. ABC, Bombay, and S.T.A. No. 97 (Bom)/1973-74-ULL, Bombay v. ITO. In ignoring the above statutory provisions and the rulings of the Income-tax Appellate Tribunal at Bombay the ITO acted contrary to law. It may be mentioned that subsequently the Karnataka High Court in Stumpp, Schuele Somappa Pvt. Ltd. v. 2nd ITO [1976] 102 ITR 320 affirmed on appeal in 2nd ITO v. Stumpp, Schuele and Somappa Private Ltd. [1977] 106 ITR 399, 407, the Bombay High Court in CIT v. Century Spg. and Mfg. Co. Ltd. [1978] 111 ITR 6 and Commissioner of Surtax v. Ballarpur Industries Ltd. [1979] 116 ITR 528, have held that the expression not includible " in r. 4 of the Second Schedule to the Surtax Rules means not capable of being included" and cannot refer to an amount which already forms part of the gross total income and which would be later on deducted for the purpose of determining the tax liability under Chap. VI-A or Chap. VII. I may also mention at this stage that in the regular assessment of Siemens the ITO took the same vie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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