Commissioner of Income Tax, Kanpur vs U.P. Textiles Corpn. Ltd.

Prakash Krishna, J.—The above appeal has been filed u/s 260A of the Income Tax Act and it relates to the assessment year 1989-90. Challenging the legality and validity of the order dated 28.3.2000 passed by the Income Tax Appellate Tribunal (Bench ''B'') Allahabad hereinafter referred to as (Tribunal) in ITA No. 2735 (All.) of 1992, the Commissioner of Income Tax has approached this Court. The respondent, an assessee, is a company. It filed income tax return on 28.12.1989 declaring a total loss of Rs. 67,24,21,020. The Assessing Officer processed the income tax return and issued an intimation by invoking section 143(1)(a) of the income tax Act. Subsequent thereto, he issued a notice calling upon the assessee on the ground that the following claims for deduction made by it, were prima facie inadmissible, and therefore wrongly allowed to it.

1.

Under Rule 6B

Rs. 19,708

2.

Entertainment after allowing Rs. 5000 u/s 37(2A)

Rs. 51,232

3.

Provision for gratuity u/s 40A(7)

Rs. 44,64,736

4.

Under section 43B

Rs. 14,35,929

The Assessing Officer thereafter passed a rectification order dated 30.12.1991 u/s 154 of the Act and disallowed the afore stated four deductions. Thus after making the adjustments of the aforestated amounts to the tune of Rs. 59,71,605 reduced the loss returned by the assessee to that extent. An order charging additional income tax on the adjustment of Rs. 59,71,605 was also passed.

The rectification order was the subject matter of the appeal before the Commissioner of Income Tax(Appeals), II-Kanpur who by its order dated 30.9.1992 followed the judgment of this in Indo-Gulf Fertilizers and Chemicals Corporation Ltd. Vs. Union of India (UOI) and Another, allowed the appeal. It has been held therein that if the resultant income of the assessee is a loss even after the adjustment made u/s 154 of the Act, additional tax will not be leviable. The Department carried the matter further in appeal before the Tribunal. The Tribunal dismissed the appeal of the Department. Hence, the present appeal.

The appeal has been admitted on the following three substantial questions of law as framed in the memo of appeal:

(1) Whether on the fact and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in confirming the order of the Commissioner of Income Tax (Appeals) quashing the order u/s 154 of the income tax Act, 1961 made by the Assessing Officer?

(2) Whether on the facts and in the circumstances of the case, the income tax Appellate Tribunal was correct in upholding the deletion made by the Commissioner of income tax (Appeals), of the additional income tax levied u/s 143(1A) of the income tax Act, 1961 by the Assessing Officer?

(3) Whether on the fact and in the circumstances of the case, the income tax Appellate Tribunal was correct in law in confirming deletion made by the Commissioner of income tax (Appeals), of the additional income tax levied u/s 143(1) of the Income Tax Act, 1961 by the Assessing Officer without appreciating that additional income tax was leviable in this case in view of the provisions of section 143(1A) (B) of the income tax, 1961 substituted by the Finance Act 1993 with retrospective effect from 01.04.1989?

Heard Shri Shambhu Chopra, learned senior standing counsel for the Department in support of the appeal. None appeared on behalf of the respondent. It may be placed on record that respondent''s earlier counsel has been elevated to the Bench, notice by registered post for engaging another counsel was issued to the respondent. The office has reported that neither acknowledgement nor undelivered cover has been received back after service. The service of notice on the respondent is held sufficient.

Question No.1

As noticed herein above, the first appeal of the assessee was allowed on the short ground that even after adjustment it was loss of income. The ambit and scope of the rectification power of the Assessing Officer exercised u/s 154 of the Act has not been gone into either by the First Appellate Authority or by the Tribunal. Section 143(1) was amended by the Direct Tax Laws (Amendment) Act 1987 with effect from 1.4.1989. A new scheme of assessment was introduced in the newly substituted section 143 (with effect from 1.4.1989). A proviso to clause (a) of sub section (1) of the new section enabled the Department to make the following adjustments to the return income or loss for the purposes of computing the tax or interest payable by or refundable to the assessee:

(i) correction of any arithmetical errors in the return, accounts or documents, accompanying the return.

(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of information available in such return or the accompanying accounts or documents, is prima facie admissible or inadmissible, as the case may be.

Presently, we are concerned with the allowance or disallowance etc. which is on the basis of information available in such return or the accompanying amounts or documents, is prima facie inadmissible. Thus before making any disallowance of any loss carried forward etc, there were two requirements of law at that time. The allowance etc. claimed could be disallowed only.

(i) on the basis of information available in the return and

(ii) is prima facie inadmissible.

Coming to the facts of the present case, the above question with regard to disallowance of certain claims u/s 154 of the Act has not been gone into either by the First Appellate Authority or by the Tribunal. For the simple reason that they were in agreement with the assessee on the second point that even after disallowance of certain claim is made by the Department, it is a case of loss, and as such, liability to pay additional tax is not there. The legality or propriety of disallowance of Rs. 59,71,605 on its merits was left untouched.

In this factual scenario, it is not desirable to say anything with regard to the legality and propriety of the rectification order, on merits.

In view of the proposed order to be passed while answering the question Nos. 2 & 3, the above point is left open for consideration before the authorities below, if so raised by the assessee. It is not necessary to dwell upon this point any further except that the question is not proposed to be answered either way.

Question Nos. 2 & 3

The two authorities below proceeded to set aside the rectification order charging additional income tax on the adjustment of Rs. 59,71,605 in view of the Division Bench decision of this Court in the case of Indo-Gulf Fertilizers & Chemicals Corpn. Ltd. (supra).

The learned standing counsel rightly points out that the said decision should be read subject to the subsequent decision of the Apex Court in the case of Assistant Commissioner of Income Tax Vs. J.K. Synthetics Ltd., .

On a careful consideration, we find that the Apex Court has held that where the assessee had returned a net loss and after adjustment made u/s 143 (1)(a) of the Act, the amount of loss is to be reduced, the levy of additional tax on the assessee u/s 143(1A) of the Act is justified. The Apex Court has held that sub section (1A) was amended by the Finance Act, 1993 with effect from 1.4.1989, it was the date upon which sub section (1A) had been introduced into the Act. It has been held that the substituted sub section (1A) made it clear that even where the loss declared by an assessee has been reduced by reason of adjustments made under sub section (1)(a), the provisions of sub-section (1A) would apply.

In view of the authoritative pronouncement, we find sufficient force in the argument of the learned counsel for the Department that the Tribunal was not justified in setting aside the order passed by the Assessing Officer so far as it relates to charge of additional income tax on the adjustment of Rs. 59,71,605 is concerned. In nutshell it is therefore, held that the Tribunal was not correct in upholding the deletion made by the Commissioner of Income Tax (Appeals) of the additional income tax levied u/s 143(1A) of the Act. The question Nos. 2 & 3 are therefore, decided by holding that the order passed by the First Appellate Authority and the Tribunal holding that assessee is not liable to pay additional income tax is legally bad and therefore, are not sustainable in law.

Having said so as above, is not the end of the matter. The question whether the Assessing Officer, on merits was justified in passing the rectification order dated 30.10.1991 (which was subject matter of the appeal) is yet to be gone into. The said issue was not examined by the appellate authorities below as they decided the appeal on another point which has not been held to be valid by this order. To serve the interest of justice, it is desirable that either the Tribunal itself, or it may remand the matter to the First Appellate Authority, to decide the question as to whether the rectification order on merits could or could not have been passed in the facts and circumstances of the case. By way of clarification, it may be added that now the authorities below shall examine the question of disallowance of various items 1 to 4 as was claimed by the assessee in the return in view of the limited power of rectification as provided for u/s 143(1)(a) of the Act. In view of the above discussions, the appeal is allowed in part, as indicated above. The stand of the Department in so far as question Nos. 2 & 3 are concerned is held justified and to that extent orders under appeal are hereby modified and question No. 1 is left open to be decided by the concerned authority, if so, pressed by the assessee. No order as to costs.