Commissioner of Income Tax vs B. Suresh Baliga

Dilip B. Bhosale, J.—These two income tax appeals are directed against the order dated September 22, 2006, rendered by the income tax Appellate Tribunal, Bangalore, "B" Bench (for short "the Tribunal") in IT(SS)A No. 10/PANJ/2002 and 8/PANJ/2002, whereby both these appeals were partly allowed. The appeals before the Tribunal were filed by the Assistant Commissioner of income tax against the order dated April 30, 2002, rendered by the Commissioner, of income tax (Appeals)-VI, Bangalore (for short "the appellate authority"). The appellate authority by the order dated April 30, 2002, allowed the appeals partly. Those appeals were directed against the assessment order dated January 31, 2002, passed by the Assistant Commissioner of income tax (Central) Circle, Mangalore, (for short "the Assessing Officer"). We have heard the counsel for the parties.

In the present appeals, the Revenue has formulated the following three substantial questions of law in the memorandum of appeal:

Whether the appellate authorities were correct in setting aside the disallowance of sundry debtors claim by the assessee when the same had not been disclosed in the course of search and the same was not supported by bills and the alleged debtors had only dealt with the assessee which evidence was not taken into consideration and accounts/books had not been maintained u/s 36(1)(vii) of the Act?

Whether the appellate authorities were correct in deleting the levy of surcharge by the Assessing Officer on the date of search based on the Finance Act when the same can be levied only after the introduction of proviso to section 113 of the Act?

Whether the appellate authorities were correct in condoning 3 months delay in charging interest u/s 158BFA(1) of the Act, when the same was leviable and the Assessing Officer had no jurisdiction to condone the same?

Learned counsel appearing for the respondents at the outset submitted that the tax effect being less than Rs. 4,00,000. These appeals, in view of Instruction No. 2 of 2005, dated October 24, 2005, issued u/s 268A of the Act are not maintainable.

Having confronted this, Mr. Aravind, learned counsel appearing for the Revenue, submitted that though the tax effect is less than four lakhs, question Nos. 2 and 3 are recurring in nature and, therefore, these questions deserve to be decided one way or the other. He submitted that, in so far as the second question is concerned, there were several appeals filed in this court, involving the very question, and they were all decided against the Revenue. He submitted that the Revenue carried the judgment and order of this court to the Supreme Court and the Supreme Court allowed the appeals filed by the Revenue and the issue is now referred to the larger Bench. In support of this contention he placed before us an order of a coordinate Bench in Commissioner of Income Tax, Mysore Vs. K.C. Puttaswamy Gowda, and submitted that, since the issue is now pending before the larger Bench, the orders passed by the Assessing Officer be restored with a direction to the Assessing Officer to await the decision of the larger Bench of the Supreme Court and to give effect to the order only after the decision of the larger Bench of the Supreme Court. These facts itself demonstrate that question No. 2, arises repeatedly, and, therefore, these appeals cannot be disposed of as not maintainable.

It would be relevant to reproduce the order passed by this court in similar circumstances and answer the second question in terms thereof. It is not in dispute that this question is covered by this judgment. The order passed in K.C. Puttaswamy Gowda (supra) reads thus:

The Revenue has preferred this appeal challenging the order passed by the income tax Appellate Tribunal which held that the proviso to section 113 which was inserted by Finance Act, 2002, with effect from June 1, 2002, does not have retrospective application, therefore, the surcharge levied on the assessee is not leviable and therefore, it preferred to delete surcharge. Aggrieved by the said order, Revenue has preferred this appeal.

The apex court in the case of Commissioner of Income Central II Vs. Suresh N. Gupta, has held as under (page 340 of 297 ITR):

According to the assessee, prior to June 1, 2002, the position was ambiguous as it was not clear even to the Department as to which year''s Finance Act would be applicable. To clear this doubt precisely, the proviso has been inserted in section 113 by which it is indicated that the Finance Act of the year in which the search was initiated would apply. Therefore, in our view, the said proviso was clarificatory in nature. In taxation, the legislation of the type indicated by the proviso has to be read strictly. There is no question of retrospective effect. The proviso only clarifies that out of the four dates, Parliament, has opted for the date, namely, the year in which the search is initiated, which date would be relevant for applicability of a particular Finance Act. Therefore, we have to read the proviso as it stands.

There is one more reason for rejecting the above submission. Prior to June 1, 2002, in several cases, tax was prescribed sometimes in the 1961 Act and sometimes in the Finance Act and often in both. This made liability uncertain. In the present case, however, the rate of tax in case of block assessment at 60 per cent was prescribed by section 113 but the year of the Finance Act imposing surcharge was not stipulated. This resulted in the above four ambiguities. Therefore clarification was needed. The proviso was curative in nature. Hence, the proviso inserted in section 113 merely clarifies that out of the above four dates, the relevant date for applicability of the Finance Act would be the year in which the search stood initiated u/s 158BC.

Therefore, the apex court has said that such proviso is curative in nature and it merely clarifies that for a relevant date for applicability of the financial year would be the year in which the search is initiated u/s 158BC. Therefore, the order of the Tribunal is contrary to the order passed by the Assessing Officer and it is hereby set aside.

However, in the case of Commr. of Income Tax-I, New Delhi Vs. Vatika Township P. Ltd., after referring to the aforesaid Supreme Court judgment, the larger Bench of the apex court was at the view that the aforesaid judgment requires to be considered by a larger Bench and, accordingly, a direction was issued by the Registry to place the matter before the larger Bench. It was submitted that, now the matter is before the larger Bench.

Under these circumstances, as the law stands today surcharge is payable by the assessee. In the event of the larger Bench of the Supreme Court reversing the aforesaid judgment of the apex court and holding surcharge is not leviable, the assessee is absolved of the liability to pay surcharge. Therefore, in our view, the proper order to be passed is to set aside the order of the Tribunal and remit the matter to the assessing authority with the direction to await the judgment of the apex court and consequent to the order passed by the larger Bench to give effect to our order. Hence, the following order:

Appeal is allowed.

The impugned order passed by the Tribunal is hereby set aside.

The orders passed by the assessing authority and the Appellate Commissioner is restored.

However, the Assessing Officer shall await the decision of the larger Bench of the apex court and depending on the decision to be rendered by the apex court to give effect to the order. Matter remanded.

In the circumstances, the second question is answered in favour of the Revenue. However, the Assessing Officer shall await the decision of the larger Bench of the Supreme Court and may proceed subject to outcome of the decision that will be rendered by the Supreme Court.

It is not in dispute that the third question is also covered by the judgment of this court in Commissioner of Income Tax and Another Vs. Khoday India Ltd., . In this case, the Division Bench considered the question whether the assessee is liable to pay interest u/s 158BFA(1) of the income tax Act in view of the mandatory provision for belatedly filing the return of income for the block period ? It would be relevant to reproduce paragraphs 35 and 48 thereof which is the clear answer to this question. Paragraphs 35 and 48 reads thus (pages 227 and 230):

In so far as the question of levy of interest u/s 158BFA of the Act is concerned, we have to indicate that the scheme of block assessment under Chapter XIV-B of the Act is virtually a self-contained code, providing for a variation of the manner in which the liability for payment of tax is determined and covering a situation where an undisclosed income relatable to the block period had not suffered tax only due to the non-disclosure and the non-disclosure coming to light in the course of certain search proceedings, etc. The normal period of limitation for reopening is not made applicable and one very distinguishing feature is that the rate of tax at which the income as assessed for the block period is to be made liable is provided for u/s 113 of the Act itself unlike in other situations, where rate of tax is relegated to the Finance Act of each year...

In the wake of our understanding of the provisions of sections 158BFA(1) and 158BD as indicated above we are of the opinion that the Tribunal is clearly in error in directing the deletion of the interest part on the tax amount as ultimately determined but for the period during which there is a delay in filing the return. Questions are accordingly answered in favour of the Revenue and against the assessee in the negative.

The third question is accordingly answered in favour of the Revenue and against the assessee.

Mr. Aravind, learned counsel appearing for the Revenue, submitted that the Tribunal has not dealt with the first question in the light of the judgment of the Supreme Court in TRF (T.R.F.) Limited Vs. Commissioner of Income Tax, Ranchi, . He submitted that even the Assessing Officer ought to have decided the case in conformity with the law laid down by the Supreme Court in the said judgment. In support of this contention he invited our attention to the observations made by the appellate authority in paragraph 8 thereof and submitted that the authorities below committed a grave error of law in allowing writing off of the bad debts on percentage basis.

The Supreme Court in T.R.F. Ltd., dealt with the provisions containing section 36(1)(vii). Relevant observations made by the Supreme Court in the said judgment reads thus (page 398 of 323 ITR):

This position in law is well-settled. After April 1, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in the accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer''s account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the above mentioned aspect only and that too only to the extent of the write-off.

To appreciate and to understand the contentions urged by Mr. Aravind, learned counsel for the Revenue, it would be relevant to reproduce paragraph 8 from the order of the appellate authority which reads thus:

Sundry debtors: The Assessing Officer has computed the figure of amount receivable arising out of unaccounted sales as evidence by a long back seized. During the courses of appellate proceedings the authorised representative has pointed out that in respect of the pages 8, 20 and 30 of the long book dated May 11, 1999, October 27, 1999, and January 19, 2000, pertaining to debtors, Sri Thimmappanna, Shariff and Shashi, the Assessing Officer has actually made double additions. The total of which works out to around Rs. 44,000. There are a number of bad debts as well. These represents small scale of Rs. 400 or Rs. 500 of each, the details of which was furnished by the Assessing Officer to the assessee on the basis of a request made to the Assessing Officer to compute the correct figure. The assessee has not been able to recover a substantial amount. However, I would restrict the percentage of bad debt to around 20 per cent. The net figure of sundry debtor is, therefore, computed at Rs. 2,30,000 approximately.

The Tribunal also confirmed the finding recorded by the appellate authority on this question. From a bare perusal of the observations made by the appellate authority on the first question it is clear that the submissions advanced by Mr. Aravind learned counsel for the Revenue that the Assessing Officer as well as the Tribunal have not answered the first question in conformity with the order of the Supreme Court is correct. It appears that the order of the Supreme Court in T.R.F. Ltd., was not brought to the notice of these authorities. Learned counsel for the respondent-assessee does not dispute the submissions of Mr. Aravind. In the circumstances, the order of the Tribunal in so far as the first question is concerned, is set aside and the matter is remanded to the appellate authority for deciding it afresh.

Thus, the finding on the first question recorded by the Tribunal are set aside. The Tribunal shall consider the first question afresh in the light of the judgment of the Supreme Court in T.R.F. Ltd., as expeditiously as possible preferably within a period of one year from the date of receipt of this order.

As prayed for by the learned counsel for respondent, all contentions in so far as the first question is concerned, are kept open. The appeals are accordingly disposed of. No costs.