Indian Drugs and Pharmaceuticals Ltd. vs Union of India and Others

Sanjiv Khanna, J.—Indian Drugs and Pharmaceuticals Ltd., a public sector undertaking, has filed the present writ petition for quashing of the

intimation dated April 4, 1990, u/s 143(1)(a) of the income tax Act, 1961 (""the Act"", for short). The petitioner has also prayed for quashing of the

consequential orders passed thereafter by the Assessing Officer rejecting the application for rectification in respect of two items (i) unpaid bonus of

Rs. 1,57,05,083, and (ii) unpaid taxes of Rs. 1,67,76,886. We may record that some other adjustments were also made in the intimation u/s

143(1)(a) but these have been deleted/withdrawn by the Assessing Officer while passing rectification orders u/s 154 of the Act. These orders are

dated July 17, 1990, and September 24, 1990. With regard to the unpaid bonus and taxes in the adjustment sheet, the Assessing Officer has

mentioned that he relies upon the audit report paragraph 7(a) and 7(d).

In the rectification application dated May 22, 1990, which was filed before the Assessing Officer, it was stated as under:

3.1 Provision for bonus : An amount of Rs. 1,59,00,702 has been provided for bonus for the staff at 8.33 per cent. in accordance with the

provisions of the Payment of Bonus Act, 1965. The auditor''s report in Form 3CD does not contain any qualification. Annexure 7 attached to the

said audit report gives the break up of the aforesaid figure location-wise of the various units. Under these circumstances, it is just not understood as

to how the amount of Rs. 1,57,05,083 could be disallowed. The section under which the disallowance has been made has not been indicated. The

reason for making the dis-allowance is conspicuous by its total absence.

3.2 Unpaid taxes : An amount of Rs. 1,67,76,886 has been added back under this head presumably as per the observations contained in the

auditor''s report as per clause 7(a) and 7(d) thereof.

3.2.1 In particular, the entirety of the sum as mentioned by the auditors in clause 7(d) has been disallowed. The auditors have nowhere said in their

report that the impugned amount was not paid over to the exchequer on such date on which they were due. After the amendment of section 43B of

the Act, there are two conditions involved in making any disallowance. The first of these is that it must be a sum which falls within the ambit of

section 43B of the Act and the second condition is that such sum, according to the law applicable to that sum, should not have been paid by the

due date prescribed under that law. Your goodself has made a most arbitrary disallowance without either considering the legal requirements or the

factual position pertaining to the case. The payments relate to sales tax, income tax, professional tax, tax deducted at source, CPF and ESI

contributions for which the due dates of payments fall after 31st March. All these are in the nature of statutory payments where delay in payment

beyond the prescribed date involves penalties. In other words, payment or these items can, at most be delayed but cannot be avoided. All these

payments would have been made after March 31, 1989, as per the prescribed dates. If at all there was any difference of opinion between

ourselves and the Department then it was incumbent on the Department to point out such items along, with the reasons applicable to those items

for making disallowance. There cannot be a wholesale disallowance of the type as made by your goodself.

3.2.2. A further amount of Rs. 42,42,531 pertaining to the staff dues must also have been cleared by the respective units as per the dates

applicable to such amounts under the Government statutes has been disallowed in toto without even making as much as an enquiry into the aspect

of such amount within the time as required under law.

3.2.3. The entirety of the disallowance on both the above counts is totally misconceived and untenable.

The assessee, during the course of the rectification proceedings, had filed full details for the payments made towards bonus up to the date of

filing of the return and also actual payment made along with a photocopy of challans towards sales tax, surcharge, ESI, etc. Copy of the said letters

have been placed on record by the petitioner. With regard to bonus, it stated that full details of the actual bonus paid were earlier not available as

the offices were located at Madras, Gurgaon, Hyderabad and corporate office. These details and proof were filed with the rectification application.

The first order passed by the Assessing Officer u/s 154 of the Act dated July 17, 1990, did not specifically deal with the contention of the

petitioner-assessee. In the second order passed by the Assessing Officer u/s 154 of the Act dated September 24, 1990, records as under:

The various contentions put forth by the assessee-company have been carefully considered but it is found that the claims put forward at S. Nos. 1

and 2 above cannot be accepted because as per the provisions of section 43B the assessee did not enclose with the return the necessary evidence

for the payment thereof. The certificates now filed cannot be considered. Thus, there is no mistake apparent from record which could be rectified

u/s 154. Hence, the claim for deduction now made is disallowed.

The aforesaid reasoning cannot withstand legal scrutiny and is contrary to the decision of this court in S.R.F. Charitable Trust Vs. Union of India

and others, , wherein it has been held as under (page 98):

In the instant case, it is clause (iii) of the proviso which was sought to be applied by the income tax Officer. The said clause clearly provides that

the income tax Officer can make an adjustment to the income or loss declared in the return if, on the basis of the information available in such

return, accounts or documents, the deduction, allowance or relief claimed is prima facie inadmissible. The conclusion that the claim of the assessee

is inadmissible must, in other words, flow from the return as filed. No power is given to the income tax Officer to disallow a claim for the reason

that there is no proof in support of the claim made by the assessee. In a way, the said clause (iii) of the proviso is analogous to section 154 of the

Act. Where it is evident from the return as filed, along with the documents in support thereof, that a claim of the assessee is inadmissible, only then

an adjustment under the said proviso can be made. If poof in support of the claim is not furnished by an assessee, then for the lack of proof, no

disallowance or an adjustment can be made. The only option which is open to the income tax Officer, in, such a case, is that he can require the

assessee to furnish proof in which case he will presumably have to issue notice u/s 143(2). This is also evident from the fact that, except for the

documents specified, the assessee is not required to file the entire books of account or other documents along with the return. The proof in support

of the claim may be evidenced from correspondence, from the books of account or other documents and it is not the law, as we understand it,

that, in support of a claim made in the return for deduction or non-taxability of a receipt, all the proofs available and original documents must be

filed along with the return. It is apparent on a reading of the said provision that adjustment can be made only if there is information available in such

return that prima facie a claim or allowance is inadmissible. For the aforesaid view which we are taking, support is available from the understanding

of the said provision by the Department itself. Learned counsel for the petitioner has drawn our attention to Circular No. 549 reported at [1990]

182 ITR (St.) 1, at page 21 issued by the Central Board of Direct Taxes wherein examples have been given of adjustments which can be carried

out. The relevant part of the said circular is as under :

''The prima facie adjustments mentioned at (ii) above can be made only on the basis of information available in the return or the accompanying

accounts or documents and not on the basis of the past records of the assessee. Some examples of such prima facie admissible or inadmissible in

respect of which adjustments can be made to the returned income or loss are :

(i) While computing income under the head ""Salaries'''', standard deduction u/s 16(1) is not claimed, or claimed at a figure which is less than or in

excess of the permissible limit.

(ii) While computing income under the head ""Income from house property"", deduction for one-sixth for repairs or for a new unit under the proviso

to section 23 is not claimed, or claimed at a figure which is less than or is in excess of the permissible amount.

(iii) While computing income under the head ""Profits and gains of business or profession"", depreciation is claimed at rates lower or higher than

those provided for in the income tax Rules.

(iv) While computing capital gains, deduction of Rs. 10,000 u/s 48(2) is not claimed or claimed less or in excess of this amount.

(v) Carried forward speculation loss set off against income from business or profession or against income under any other head.

(vi) Loss under any head, other than under the head ""Profits and gains of business or profession"", carried forward and set off, against the current

income.

(vii) Carried forward loss of business set off against income of the current year under other heads.

(viii) Old loss of more than eight assessment years set off against the current business income, if the information is available in the return or the

accompanying documents.

(ix) Deduction u/s 80C in respect of provident fund contributions or life insurance premia or N.S. C. VI or VII Issue not claimed, though the

information is available in the documents accompanying the return, or claimed at a figure which is less than or is in excess of the permissible

amount.

(x) Deduction u/s 80L not claimed or claimed at figure which is less than or is in excess of the permissible amount.

(xi) Deduction u/s 80G not claimed, although allowable on the basis of the information available in the return or the accompanying documents or

claimed at a figure which is less than or is in excess of the permissible limit.

(xii) Deduction u/s 80M claimed at sixty per cent. of gross dividend income instead of on net dividend income in violation of the provisions of

section 80AA.

It may be mentioned that the above is not an exhaustive but only an illustrative list of prima facie admissibles or inadmissibles for which adjustments

can be made to the returned income or loss.

The aforesaid examples contained in the circular clearly show that, for want of proof, no disallowance or adjustment can be made. It is only when

a disallowance is evident from the facts on record that in adjustment can be made.

It is clear from the aforesaid reasoning that in case the Assessing Officer wanted to reject any expenditure for want of proof/evidence, he should

have issued notice and called for the said evidence for deciding the question. The Assessing Officer could not have made the said addition for want

of documents. In the present case, this procedure was not followed and the adjustment were made without notice. The adjustment made are not

covered by the scope of section 143(1)(a) and as per the law expounded in S.R.F. Charitable Trust (supra). We may record that the payments

were made by the assessee before the due date of filing of the return and these aspects have not been denied and referred to by the Assessing

Officer. In these circumstances, we allow the present writ petition and intimation dated April 4, 1990, making adjustment of Rs. 1,57,05,083 and

Rs. 1,67,76,886 on account of alleged unpaid bonus and taxes is set aside and quashed. The writ petition is allowed to the extent indicated above.

There will be no order as to costs.