COMMISSIONER OF INCOME TAX vs NAHAR SPINNING MILLS LIMITED.

N. K. AGRAWAL, J. :

This is an application by the CIT under s. 256(2) of the IT Act, 1961 (for short, "the Act") seeking a direction to the Tribunal to refer the following questions of law to this Court for opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that prima facie adjustment made under s. 143(1)(a) is not permitted by law, when on the face of the statement of accounts, it was clearly a wrong claim of the assessee ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that income from non-trade investment forms part of profit from business or profession for the purpose of deduction under s. 80HHC ?"

Assessee-company filed return of Income Tax on 31st December, 1992 for the asst. yr. 1992-93 (accounting year ending on 31st March, 1992 declaring income of Rs. 4,55,80,306. A revised return was filed thereafter, declaring income at Rs. 5,67,65,120. The AO, while processing the return under s. 143(1)(a) of the Act, found that the assessee had claimed deduction under s. 80HHC of the Act at Rs. 15,58,37,625 in the revised return as against Rs. 16,70,22,438 in the original return. The AO also noticed that the assessee-company had claimed excessive deduction under s. 80HHC by including a sum of Rs. 2,04,27,492 as business income whereas it was income from non-trade investments. The AO treated the said income as "income from other sources" and excluded it from the business income. Deduction under s. 80HHC was restricted to Rs. 14,02,93,479. The AO passed an order (intimation) under s. 143(1)(a) of the Act on 11th January, 1994.

Assessee moved an application under s. 154 of the Act seeking rectification but that was rejected. Assessee went in appeal before the CIT but the appeal was dismissed. Assessee, however, succeeded in its appeal filed before the Tribunal and the claim as made under s. 80HHC was allowed.

Shri R. P. Sawhney, learned senior counsel for the Department, has argued that income from trade investments could not be treated to be profit from business for purposes of deduction under s. 80HHC. He has justified the action of the AO in making prima facie adjustments. Shri Sawhney has contended that intimation under s. 143(1)(a) was not invalid or bad in law and AO was not precluded from processing the return. It has been explained by Shri Sawhney that the assessee had shown in the balance sheet certain income (from non-trade investments) under the head "other income". He has argued that this is an area which is not free from controversy or doubt and, therefore, question of law should be sought from the Tribunal for the purpose of giving opinion. Question to be decided is as to what is the scope and ambit of adjustment to be made under s. 143(1)(a) of the Act.

Shri B. S. Gupta, learned senior counsel for the assessee, has opposed this application with the plea that the action of the AO was not in the nature of prima facie adjustment and, therefore, the Tribunal rightly accepted the assessees appeal and cancelled the intimation issued by the AO under s. 143(1)(a) of the Act. Shri Gupta has also argued that a return could not be processed under s. 143(1)(a) after a notice under s. 143(2) had been issued to the assessee. Reliance has been placed by Shri Gupta on a decision of the Karnataka High Court in GOD GRANITES Vs. CENTRAL BOARD OF DIRECT TAXES and Others, , and on a decision of the Delhi High Court in Apogee International Ltd. Vs. Union of India and Another, .

From the facts as emerging from the rival contentions, it appears that a notice under s. 143(2) of the Act was issued by the AO on 17th December, 1993 posting the case for hearing for 27th December, 1993. Intimation under s. 143(1)(a) was issued by the AO on 11th January, 1994. The question, therefore, arises as to whether an intimation under s. 143(1)(a) could at all be issued after the AO decided to issue a notice under s. 143(2) of the Act. The controversy before the Delhi High Court in Apogee International Ltd. & Anr. vs. Union of India & Anr. (supra), was, however, different. There the question had come for examination before the Court about a notice issued under s. 143(2) after the intimation had been sent to the assessee under s. 143(1)(a) of the Act. Therefore, the question arising from the Tribunals order in the present case before us does require consideration.

Shri B. S. Gupta, learned senior counsel for the assessee, has also argued that one of the reasons for quashing the intimation under s. 143(1)(a), before the Tribunal, was that the AO had no jurisdiction to make any adjustment and issue intimation after he had already issued a notice to the assessee under s. 143(2) of the Act. The Department has not sought a question of law on that finding. Therefore, the question arising from the order of the Tribunal on that aspect of the subject has neither been sought for reference nor can be examined by this Court. Shri Sawhney at that point requested for the reframing of the question which was vehemently opposed by Shri Gupta. Shri Sawhney has argued that in the light of the decision of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., question may be properly framed so as to cover the issue arising from the order of the Tribunal. Shri Sawhney has stated that the real controversy should be settled by this Court and the question should be properly framed.

We have considered the rival contentions and we are of the view that the question whether an intimation under s. 143(1)(a) of the Act could or could not be issued by the AO after he had sent a notice to the assessee under s. 143(2) of the Act was neither raised before the Tribunal under s. 256(1) nor has been sought before this Court under s. 256(2) of the Act. However, the Department cannot be debarred from seeking the other questions which appear to arise from the Tribunals order.

Shri B. S. Gupta has further argued that the questions sought to be referred do not actually arise from the Tribunals order inasmuch as the Tribunal did not give any finding on the controversy whether prima facie adjustment was permissible or not. We have perused the order of the Tribunal and we find that the question, whether prima facie adjustment could or could not be made, has been examined by the Tribunal and thereafter, it has been held that the AO was not justified in reducing the assessees claim under s. 80HHC of the Act thereby charging additional tax of Rs. 16,09,466. Thus, the controversy was examined by the Tribunal and it cannot be said that the questions sought to be referred now do not arise from the Tribunals order.

Income from non-trade investment was treated by the AO as income from business [sic - other sources] and in that view of the matter, the AO proceeded to make prima facie adjustment. It is correct that, on account of the adjustment made by the AO, demand of Rs. 16,09,466 by way of additional tax under s. 143(1)(a) was created. The question which needs consideration is whether the AO exceeded his jurisdiction while making prima facie adjustment to the disclosed income of the assessee. It appears that the assessee had shown in the printed form of the balance sheet income of Rs. 2,04,27,492 from investment of surplus funds in short-term deposits or Government securities. Presentation of income in the balance sheet in such manner was explained by the assessee on account of the requirement under the Companies Act. Whether such presentation could or could not make any difference while making prima facie adjustment is a matter to be considered and answered. The plea of the assessee was that real nature of the income was to be seen and since it was an income from business, there was no justification to treat that income otherwise and then to make adjustment under s. 143(1)(a) of the Act.

Looking to the nature of the controversy, it appears necessary to examine the questions sought to be referred. Therefore, the Tribunal is directed to draw up a statement of the case and to refer the questions to this Court for opinion as set out in Para 1 above.