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TMI Blog1975 (7) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... ated for the change in its letter dated 14th June, 1971 : "1. We are unable to prepare our accounts by 30th June and have regularly taken permission from the Registrar of Companies for extension in the date of holding annual general meeting for presentation of annual accounts. This is mainly because of summer vacations and marriage season immediately preceding 30th June, which hampers the finalisation of accounts as a large number of staff go on leave. 2. Many Government and semi-Government bodies demand statistical and other information for the calendar year and we have to make a lot of adjustments to arrive at these figures. 3. We wish to fall in line with many other companies who adopted calendar year as their previous year." Shri G.N. Srivastava, Income-tax Officer, Special Circle, C Ward, Kanpur, in whose jurisdiction the petitioner's case fell, granted the permission on 22nd June, 1971, on the following conditions: "You are allowed to change the accounting year from the one ending 30th June to the one ending 31st December. The previous year for the assessment year 1972-73 will, therefore, comprise of a period of 18 months commencing from 1st July, 1970, to 31st Dece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs is being sought to be set off with the profits of the earlier 12 months, there is a definite reduction in the tax liability." The petitioner-company was allowed time till 14th April, 1975, to file its objections. On that date the company filed a written reply and requested for further time to enable it to file a detailed reply after consulting its counsel at Delhi. In the interim reply the company stated that it had not violated any of the conditions imposed by the Income-tax Officer and in any case, since the accounts had already been made up to 31st December, 1971, and the accounts for subsequent years had also been closed on that basis, it was no longer open to the Income-tax Officer to compel the company to revert to the accounting year ending on 30th June. It was also stated that the synthetic staple fibre and tyre cord units had been newly set up in November, 1971, and constituted a separate and distinct source of income and since it was the first year of accounting the company had the option to choose its own previous year. The company had closed the accounts of these two units on 31 st December, 1971, in accordance with the option granted to it by the Act. In other wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. We shall first demonstrate how the impugned order contravenes the principles of natural justice. The petitioner-company applied for the change of the accounting year on 14th June, 1971, and the necessary permission was granted by the Income-tax Officer on 22nd June, 1971. Both these dates are prior to 30th June, 1971, when the company was supposed to have closed its accounts. In pursuance of the order granting permission to change the accounting year, the petitioner-company applied for and obtained the permission to change its financial year from the Registrar of Companies on 26th August, 1971. Accordingly, the company did not close its accounts on 30th June and allowed them to run up to 31st December, when the accounts were finally closed. After the accounts were passed by the board of directors and the shareholders the company filed its return on 30th September, 1972. The Income-tax Officer did not take any action on the return and allowed the case to remain pending for a long time. Thereafter, the company filed a revised return on 16th April, 1974. It is clear that the stakes in the case were very heavy inasmuch as a tax of several crores was involved. The Income-tax Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ighly improbable that the Income-tax Officer could have passed the impugned order, which indeed is a lengthy and complicated one, on the 14th April, 1975, after hearing the company. However, it is not necessary to record any firm finding on this point because we are otherwise satisfied that the petitioner was denied a reasonable opportunity to meet the case set up by the Income-tax Officer. As we have indicated above, the stakes were very heavy. The petitioner-company had declared an income of Rs. 1,53,28,627 and as against this figure the Income-tax Officer computed the income at Rs. 11,47,13,978 and raised an additional demand of Rs. 7,17,89,421. This is a colossal demand which if unjustified can threaten the very existence of the company. In the circumstances, it was absolutely necessary for the Income-tax Officer to have allowed adequate opportunity to the assessee-company to explain its case. The two days' period allowed by the Income-tax Officer, in our opinion, was wholly insufficient. The request of the company for a longer time was completely justified. It is true that the Income-tax Officer was hard pressed for time as the limitation for making the assessment was to expir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peat the mistakes in the fresh assessment order which he might like to pass after the impugned order is quashed. This will avoid multiplicity of proceedings and consequential hardship to the company. We shall, therefore, deal with the contentions raised by the company on merits. The first question to be decided is whether the Income-tax Officer was justified in law in recalling the permission granted to the company to change its previous year from 30th June to 31st December. Section 3 of the Act contains the definition of the "previous year" which means the accounting year. According to this definition the previous year means the financial year immediately preceding the assessment year or if the accounts of the assessee have been made up to a different date within the said financial year then at the option of the assessee the 12 months ending on such date. Sub-section (4) of section 3 deals with a situation where an assessee has already chosen a previous year and wants to change it. This sub-section reads: "Where in respect of a particular source of income or in respect of a business or profession newly set up, an assessee has once exercised the option under clause (b) or sub-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here a deduction is proper and necessary to be made in order to ascertain the balance of profits and gains, it ought to be allowed ...... provided there is no prohibition against such an allowance ........" Therefore, in a previous year a loss arising from any activity has to be necessarily set off against the profits arising from other activities. It is only then that we can arrive at the net profits. It was, therefore, not open to the Income-tax Officer to stipulate that there shall be no loss in a part of the previous year or that if there was a loss, it shall not be allowed to be set off against the profits arising in the previous year. Such a condition was clearly contrary to the law and the Income-tax Officer had no jurisdiction to impose such condition. The condition (d) is again an ambiguous condition and wholly superfluous. It is not clear as to what exactly the Income-tax Officer meant by saying that the change in the previous year should not result in the reduction of tax liability including the surtax. That, in fact, is not a condition to be imposed upon an assessee but is a consideration which has to be kept in mind by the Income-tax Officer while permitting the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of that previous year has to be taxed at the rate specified in the Finance Act relevant to the previous year. In the case of Esthuri Aswathiah the previous year consisted of 21 months as a result of the change allowed by the Income-tax Officer under section 2(11) of the Indian Income-tax Act, 1922, which corresponds to section 3 of the Income-tax Act, 1961. The Supreme Court held that the income of the entire previous year consisting of 21 months had to be taxed at the rate prescribed in the relevant Finance Act. The contention of the assessee that the Income-tax Officer should have assessed the total income at the rate applicable to the income of the last period of 12 months was rejected in the following words at page 416: "Mr. Srinivasan alternatively submitted that the Income-tax Officer could accord sanction to the change on the basis that the income for months should be assessed at the rate applicable to the income of the last period of 12 months. This again is an impossible contention. The Income-tax Officer has no power to vary the rate at which the income of the previous year is to be assessed. The rate of tax is fixed by the Finance Act of every year. By section 3 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nteract any undue advantage gained by the company as a result of the non-fulfilment of the conditions. On behalf of the respondents it is urged that the permission being a conditional one, the permission failed when the conditions were not complied with. We do not propose to decide this controversy in view of our findings that the two conditions which the company is alleged to have contravened were not valid conditions. However, it does appear that the stand taken by the respondents will create complications. Once an assessee makes up his accounts to a particular date, he cannot write back the accounts to close them on an earlier date. The law, of course, does not indicate as to what would be the consequence if a condition imposed on the change of the previous year is not complied with by an assessee. At the same time the law does not provide that the permission can be revoked and the old previous year can be adopted. Such a course appears to us to be extremely difficult, if not impossible. The alternative contention of the company is that in respect of the two newly added units it had the option to choose a previous year ending 31 st December, 1971, and once the company had exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Officer but was allowed on appeal by the Appellate Assistant Commissioner of Income-tax and, as a result, a total sum of Rs. 2,87,60,109 had been allowed to the company as a deduction on account of excise duty for the assessment years 1964-65 to 1971-72, as detailed below: Rs. 1964-65 4,81,314 1965-66 8,89,249 1966-67 12,58,106 1967-68 16,00,876 1968-69 26,93,259 1969-70 30,54,053 1970-71 85,72,396 1971-72 1,02,10,856 -------------------- Total 2,87,60,109 -------------------- On similar basis the company made a provision of Rs. 2,08,29,486 in respect of its liability to excise duty for the previous year in question. We shall hereinafter refer to this liability as the current liability. It appears that the company has been contesting this demand. On 1st February, 1964, it filed a writ petition under article 226 of the Constitution before the High Court at Delhi, challenging the order of the Collector of Central Excise demanding duty on polymer chips. This petition was allowed by a learned, single judge on 28th August, 1970. On the basis of this judgment the Income-tax Officer has disallowed the deduction claimed by the company in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n so that there is no possibility of the liability being revived in future. If there is such a possibility then the cessation is not complete and section 41(1) is not attracted. The decision of the Delhi High Court is under appeal and there is a likelihood of its being reversed. It cannot, therefore, be said that on the date when the learned single judge of the Delhi High Court delivered his judgment the liability ceased. Indeed, there might be a further appeal to the Supreme Court. In these circumstances the Income-tax Officer was not competent to invoke the provisions of section 41(1) of the Income-tax Act because the decision of the learned single judge of the Delhi High Court had lost its finality as a result of the appeal against it. 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 becomes sub-judice, i.e., a matter under judicial enquiry. The appeal destroys the finality of the decision. This is the view expressed by the Calcutta High Court in Satyanarayana Prosad v. Diana Engineering Co. and the Oudh Chief Court in Girja Dat Singh v. Gangotri Dat Singh . Indeed, from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands for the excise duty on polymer chips. We might mention here that item No. 15A of Schedule I of the Central Excises and Salt Act, 1964, has been amended with effect from 29th February, 1974. The judgment of the Delhi High Court does not deal with the duty leviable under the amended provision. For that reason also the decision of the Delhi High Court cannot be said to be final because duty is now being sought to be levied under the amended provisions of the Act. The company, no doubt, is still resisting the claim of the excise authorities, but this fact does not debar the company from claiming deduction on account of the excise duty being demanded from it and for which the company had made provision in its books of accounts. The company is following the mercantile system of accounting and it can legitimately claim deduction in respect of a business liability even if such liability has not been quantified or paid. In Kedarnath Jute Manufacturing Co. v. Commissioner of Income-tax the Supreme Court has held that an assessee who follows the mercantile system of accounting can claim deduction under section 10(2)(xv) in respect of a business liability before it is quantified and even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake. The company cannot decide for itself whether it is liable to excise duty or not. Such a question can be decided only by a competent authority or a court of law. As has been pointed out, the decisions of the Delhi and Bombay High Courts are under appeal and the question is, therefore, Sub-judice. The Income-tax Officer, therefore, clearly went wrong in disallowing the deduction on account of anticipated liability of excise duty for which the company had made a provision in its books of accounts. This brings us to the last item of dispute, which relates to the claim of the assessee for the deduction out of its total income of an expenditure amounting to Rs. 80,74,010 incurred on scientific research. The company has raised this ground by way of an amendment application which has been allowed as the same is not opposed by the department. Section 35 of the Act deals with the deduction of expenditure on scientific research, both of capital and revenue nature. Sub-section (3) provides: "(3) If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eply to the amendment application of the company. The said annexure reads as under : "Copy of the office memorandum No. F. 3/1/76 R.A. Cell dated 18th March 1975, from the Deputy Secretary, Department of Science & Technology, New Delhi, addressed to the Ministry of Finance (Shri J. P. Jhunjhunwala, Secretary C.B.D.T.). Sub: Reference under sub-section (3) of section 35 of the Income-tax Act read with rule 6 of the Income-tax Rules, 1962-Expenditure on Scientific Research-J.K. Synthetics Ltd. Assessment year 1971-72 to 1973-74. The undersigned is directed to refer to the U.O. Note No. 206/13/75 I.T.A. II dated 24th February, 1975, of the Secretary, Central Board of Direct Taxes, on the subject cited above and to state that the matter is receiving attention of the prescribed authority in this department. The prescribed authority is however of the view that it will not be possible to settle the dispute before 31st March, 1975, as the matter requires to be gone into in its technical details carefully and both the parties have to be heard before a decision in the matter is taken. The Central Board of Direct Taxes may, accordingly, like to issue instructions to the Income-tax Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessment proceeding. In S. B. Adityan v. First Income-tax Officer the Madras High Court had to deal with a similar question under section 5(8) of the Indian Income-tax Act, 1922, which corresponds to section 119 of the Income-tax Act, 1961. This is what their Lordships observed at page 460 : "Whatever may be the true position of the Board, as the topmost administrative authority, it cannot, in our opinion, tell the assessing authority, the Income-tax Officer, what to do and what not to do in regard to a particular assessment. It would not follow from section 5(8) that except the Appellate Assistant Commissioner, the other authorities would be subject to the control of the Board in the matter of any assessment. The Board with all the plenitude of its powers cannot direct any Income-tax Officer to tax 'A' or not to tax 'B' . Such a power if assumed to exist in the Board would be calculated to deprive the assessing officer of his statutory function and would be against the grain of the judicial powers which the officer is supposed to exercise." The same is true about the prescribed authority. It has been given the power to decide a question arising with regard to the admissibi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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