Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Rampur Distillery & Chemical Co. Ltd. on 1 September, 1997
Equivalent citations: [1998]64ITD279(DELHI)
ORDER
B.M. Kothari, A.M.
1. The two appeals by the Revenue relate to the same assessee and hence, we find it convenient to dispose of these appeals by this common order.
2. The Revenue has raised the following grounds in its appeals for asst. yr. 1988-89 :
"1. That the learned CIT(A) has erred in law and on the facts of the case in cancelling the order under s. 154 which was correctly passed by the AO for cancelling the order under s. 3(4) dt. 7th December, 1987, whereby the assessee was allowed to change its previous year.
2. That the learned CIT(A) has erred in law and on the facts of the case in directing that the order under s. 3(4), dt. 7th December, 1987, will continue to be effective, without appreciating the fact that this would give rise to a situation where the assessee will have no previous year for asst. yr. 1988-89 and this situation would be incongruous with the provisions of s. 3 of the IT Act, 1961, as amended by the Taxation Laws (Amendment) Act, 1987."
3. The facts relating to the aforesaid matter are briefly as under. The appellant-company was following its previous year ending on 31st day of December, 1987. An application dt. 12th November, 1987, was filed before the AO on 12th November, 1987 seeking change of the previous year from 31st December, 1987 to 30th June, 1988. The permission was sought for changing the accounting period from 1st January, 1987 to 31st December, 1987 'to' 1st January, 1987 to 30th June, 1988, under s. 3(4) of IT Act, 1961.
3.1 The AO, thereafter issued a notice dt. 25th November, 1987, asking the assessee to explain the reasons for seeking the change in the accounting year as well as its impact on the Revenue. The hearing for this purpose was fixed for 3rd December, 1987.
3.2 The assessee submitted a reply dt. 27th November, 1987, in which he explained the reasons for seeking the change in the accounting year and also explained the impact on the Revenue. In para 3 of the said reply the assessee gave various details to show that Revenue will not in any manner be adversely affected, if the desired change in the accounting year is allowed. Thereafter, the next date of hearing was fixed on 7th December, 1987. On that day, the AO passed an order under s. 3(4) of IT Act, 1961, granting permission for change of accounting year. The assessee was thus allowed to have the accounting year for 18 months for the period from 1st January, 1987 to 30th June, 1988 relating to asst. yr. 1989-90.
3.3 After the AO passed the aforesaid order under s. 3(4) on 7th December, 1987, the Direct Tax Laws (Amendment) Bill, 1987, was introduced on 11th December, 1987. The said Amendment Act received the assent of the President on 24th January, 1988. The aforesaid Direct Tax Laws (Amendment) Act, 1987, inter alia, amended the provisions of s. 3 of IT Act, 1961 by which a uniform previous year ending on 31st day of March every year commencing from asst. yr. 1989-90 was introduced.
3.4 As a result of the aforesaid amendment, the assessee filed a return under s. 139(1) for the period from 1st January, 1987 to 31st March, 1989, on 28th December, 1989.
3.5 Thereafter, the AO without issuing any notice under s. 154(3) passed an order under s. 154/3(4) of IT Act, 1961, on 10th May, 1990, by which he cancelled the order under s. 3(4) of the Act passed by the AO on 7th December, 1987. The AO observed that while passing the order under s. 3(4), his predecessor had lost sight of the fact that s. 3 was already amended w.e.f. 1st April, 1989. In view of the amended provisions, the accounting year of the assessee for asst. yr. 1989-90 was to be closed on 31st March, 1989. The AO was of the view that the permission granted for change of the accounting year by his predecessor vide order dt. 7th December, 1987, was a mistake apparent on the record and, therefore, the order dt. 7th December, 1987, being ab initio, void was cancelled. The AO further observed that the net result of the said order under s. 154/3(4) will be that assessee-company will be assessed to tax for asst. yr. 1988-89 on its income derived during the calendar year ending on 31st December, 1987, and the income for asst. yr. 1989-90 will be assessable for the period from 1st January, 1988 to 31st March, 1989.
3.6 The assessee preferred an appeal against the said order under s. 154/3(4) dt. 10th May, 1990, before the CIT(A).
3.7 The CIT(A) vide his order dt. 12th December, 1991, cancelled the order under s. 154/3(4) passed by the AO. The present appeal by the Revenue is directed against the said order of the CIT(A).
4. The learned Departmental Representative contended that the order under s. 3(4) passed by the AO on 7th December, 1987, is patently invalid in view of the amended provisions of s. 3 which was introduced by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989. The new provisions relating to uniform accounting year have been introduced w.e.f. asst. yr. 1989-90. In case the assessee's contention is accepted, the previous year relating to asst. yr. 1989-90 will cover a period of 27th months from 1st January, 1987 to 31st March, 1989, which is not permissible under the provisions of s. 3 of the Act. It, therefore, necessarily leads to the conclusion that the order passed by the AO on 7th December, 1987 is apparently illegal as there will be no assessment for asst. yr. 1988-89 and the assessment for asst. yr. 1989-90 will cover a period of 27th months which is not legally permissible. This was an apparent mistake of law. Hence, the successor AO was right in passing the impugned order under s. 154/3(4). The CIT(A) ought to have confirmed the order passed by the AO under s. 154.
5. The learned counsel for the assessee submitted that the order under s. 3(4) passed by the AO on 7th December, 1987, was perfectly valid, when it was made. The then AO after making necessary enquiries and after considering the impact of change of accounting year on the Revenue granted permission for change of accounting year and allowed the assessee to have its accounting year from 1st January, 1987 to 30th June, 1988. It is incorrect on the part of the successor AO to state in the order under s. 154 that his predecessor had lost sight of the amended provisions of s. 3, as the relevant amendment bill itself was introduced in the parliament on 11th December, 1987, i.e., after the permission for change of accounting year was granted by the AO on 7th December, 1987. The amending Act was passed on 24th January, 1988. Thus, the amending Bill had not even seen the light of the day till the permission for change of accounting year was granted by the AO. He further submitted that as a result of subsequent amendment of s. 3 made by the Direct Tax Laws (Amendment) Act, 1987 passed on 24th January, 1988, the previous year pertaining to 19th September, 1990, had to be closed on 31st March, 1989. Therefore, as a result of operation of the amended law, the previous year which was earlier allowed by the AO to cover the period from 1st January, 1987 to 30th June, 1988, had to be extended upto 31st March, 1989. He also contended that the amended law did not prescribe any limit for the length of the transitional previous year relating to asst. yr. 1989-90. In any case, the matter is clearly beyond the scope of s. 154 as the point in issue is highly controversial and debatable.
5.1 The learned counsel also invited our attention towards the judgment of the Hon'ble jurisdictional High Court in the case of J. K. Synthetics Ltd. vs. ITO (1976) 105 ITR 864 (All). He drew our attention particularly towards the finding given by the Hon'ble jurisdictional High Court holding that the law does not provide that the permission once given for change of the previous year can be revoked and the old previous year can be adopted. There is no provision in the IT Act which justifies the cancellation of order passed under s. 3(4) by a successor ITO. He thus strongly supported the order of the CIT(A).
6. We have carefully considered the rival submissions made by learned representatives of the parties and have perused the orders of the learned Departmental authorities.
6.1 The provision of s. 3(4) as it existed at the relevant time clearly empowers the AO to grant permission for the change of accounting year upon such conditions as the AO may think fit to impose. In the present case, the board of directors of the appellant-company passed a resolution on 3rd November, 1987, for change of the accounting year to cover the period from 1st January, 1987 to 30th June, 1988. An application was submitted on 12th November, 1987 to the AO for granting permission for the said change. The AO after making necessary enquiries granted such permission vide order dt. 7th December, 1987. The order so passed by the AO granting permission for change of accounting year was perfectly a valid order in accordance with s. 3(4). The observations made by the successor AO in the order under s. 154 that his predecessor had lost sight of the amended provisions of s. 3 are patently wrong because the Amending Bill was itself introduced in the Parliament on 11th December, 1987, and the Act was passed on 24th January, 1988. This ground mentioned in the order under s. 154 is apparently incorrect. The order under s. 154 made by the AO is also not sustainable in view of the fact that such an order was made even without granting any opportunity to the assessee, which is required to be given by the specific provisions contained in this regard in s. 154(3).
6.2 The new provision of s. 3 which was introduced by the Direct Tax Laws (Amendment) Act, 1987, also nowhere provides that any permission granted for change of accounting year prior to the introduction of the new provision of s. 3 can be cancelled or withdrawn.
6.3 The new provision of s. 3, inter alia, provides that the previous year in relation to assessment year commencing from asst. yr. 1989-90 means the period which begins with the date immediately following the last day of the previous year relevant to asst. yr. 1988-89 and ends on the 31st day of March, 1989. It, therefore, means that the transitional previous year relating to asst. yr. 1989-90 may cover a longer period of more than 12 months and such previous year will commence from the last date of the accounting year relevant to asst. yr. 1988-89 and will end on 31st March, 1989. The facts of the present case are peculiar in the sense that as a result of order under s. 3(4) passed by the AO on 7th December, 1987, there was no previous year for asst. yr. 1988-89 because the assessee was allowed to have its previous year consisting of 18 months for the period from 1st January, 1987 to 30th June, 1988, relating to asst. yr. 1989-90. Thereafter, the provisions of s. 3 were amended which inter alia prescribed that the previous year relating to asst. yr. 1989-90 will end on 31st March, 1989. In such a situation, the question as to whether the previous year relating to asst. yr. 1989-90 will stand extended upto 31st March, 1989, covering the period from 1st January, 1987 to 31st March, 1989, or whether the permission already granted for change of accounting year by the AO can be cancelled and the old accounting period can be restored is a highly debatable and controversial question of law. It is well settled law that the debatable points are outside the scope of s. 154 of IT Act, 1961. Such a view is clearly fortified by the judgment of the Hon'ble Supreme Court in the case of T. S. Balaram, ITO vs. Volkart Bros. & Ors. (1971) 82 ITR 50 (SC). The impugned order passed by the AO under s. 154 is liable to the quashed on this ground also.
7. In view of the aforesaid facts and discussions and in view of the elaborate reasons given by the CIT(A) in the order passed by him, we do not find any justification in interfering with the view taken by the CIT(A). In our view, the Revenue's appeal has no merit.
Asst. yr. 1989-90 :
8. We will now deal with the Revenue's appeal for asst. yr. 1989-90.
9. The assessee-company filed a return on 29th December, 1989, declaring a loss of Rs. 7,87,68,821. The AO processed the said return under s. 143(1)(a) and made various adjustments by way of additions and disallowances aggregating to Rs. 86,69,364 and thereby determined the assessee's total loss at Rs. 7,00,99,457 vide intimation dt. 11th May, 1990. The assessee filed an application under s. 154 on 8th October, 1990, in which the various disallowances and additions made by way of prima facie adjustments under s. 143(1)(a) were disputed. The AO passed order under s. 154/143(1)(a) on 7thg March, 1991, in which the prima facie adjustments were reduced to Rs. 80,85,301. Thus, he granted deductions in respect of certain items of disallowances and additions to the extent of Rs. 3,84,063. The assessee preferred further appeal against the said order under s. 154 before the CIT(A).
10. The CIT(A) vide impugned order dt. 12th December, 1991, came to the conclusion that the various additions and disallowances made by the AO are of a disputed nature and such adjustments do not fall under the category of prima facie inadmissible items. He, however, observed that the AO will be free to take up the case for regular scrutiny and assessment under s. 143(3) where he can consider the allowability of such items of additions and disallowances. He accordingly directed the AO to modify the order under s. 154 by excluding the items of adjustments indicated in the explanatory sheet forming part of the intimation under s. 143(1)(a) and not to demand any additional tax in this case.
11. The present appeal by the Revenue is directed against the said order passed by the CIT(A).
12. The learned Departmental Representative contended that the findings given by the CIT(A) are contrary to the provisions of law. CIT(A) has placed reliance on the judgment of the Hon'ble Delhi High Court in the case of Modi Cement Ltd. vs. Union of India. The effect of the said judgment was nullified by insertion of new sub-s. (1A) in s. 143 which inter alia, provides that where as a result of adjustment made under first proviso to s. 143(1) (a), the loss declared by such person in the return is reduced or is converted into income, the AO shall charge additional tax @ 20 per cent. of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person. This amendment was made by the Finance Act, 1993, with retrospective effect from 1st April, 1989. Therefore, the AO was justified in charging additional tax on the amount of prima facie adjustments made in the intimation under s. 143(1)(a). He also supported the various additions and disallowances made by way of prima facie adjustments while processing the return under s. 143(1)(a).
12.1 The learned counsel for the assessee supported the order of the CIT(A) and invited our attention towards the detailed written submissions submitted before Dy. Commr. (Asst.) in which submissions were made with regard to each item of disallowances and additions made by the AO with a view to prove that such additions and disallowances were of a debatable nature. He further invited our attention towards the instructions issued by the CBDT No. 1814, dt. 4th April, 1989, in which it was clarified that items of debatable nature will fall outside the scope of adjustments under s. 143(1)(a). He thus strongly supported the orders of CIT(A).
13. We have carefully considered the submissions made by the learned representatives of the parties and have perused the orders of the learned Departmental authorities.
13.1 The proviso to s. 143(1)(a) empowers the AO to make adjustments while processing the return under s. 143(1)(a) in respect of apparent mistake specified in the said proviso. It permits adjustments in respect of any arithmetical errors in the return, accounts or documents accompanying the return. Any deduction, allowance or relief or any carry forward of loss which is prima facie admissible but which has not been claimed in the return may be allowed. It also authorises the AO to disallow any deduction, allowance or relief or carry forward of loss claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie, inadmissible. Only such rectification are allowed to be done by way of adjustments while preparing the intimation under s. 143(1)(a). It is well settled law that the items which are debatable in nature or which require further investigation will not come within the ambit and scope of such prima facie adjustments contemplated in s. 143(1)(a). We will, therefore, have to examine the various additions and disallowances made by the AO by way of prima facie adjustments under s. 143(1)(a) keeping in view the limited scope of such prima facie adjustments which are like rectification provisions contained in s. 154.
(1) Disallowance of Rs. 91,503 out of travelling expenses under r. 6D :
The assessee in the written submissions submitted before the AO in his application under s. 154, had inter alia, stated that the AO has disallowed the said sum on the basis of tax audit report. The said report of the tax auditor is simply an opinion expressed by the auditors with which the company did not agree. It was also pointed out that the various Benches of the Tribunal have been taking different views in relation to interpretation of r. 6D. In the tax audit report, the auditors have themselves referred to the reliance of the assessee on the interpretation given by the Tribunal in the case of S. V. Ghatalia vs. ITO (1983) 4 ITD 583 (Bom). After considering the submissions made by the learned representatives, we are of the view that the disallowance of travelling expenses was a debatable item and such a disallowance could not have been made by way of prima facie adjustment under s. 143(1)(a).
(2) Disallowance of Rs. 50,554 made under s. 40A(9) :
The AO in the original intimation disallowed Rs. 50,554. In the order under s. 154, the disallowance was restricted to Rs. 29,446 and the balance disallowance Rs. 20,258 was deleted. The disallowance sustained in the order under s. 154 comprises of Rs. 28,246 paid by way of subscription/membership fee of the various officers with the Rotary Club, Lions Club and other associations. Rs. 1,200 was paid towards Diners Club. The liability of such expenses claimed in the return is also debatable and cannot be disallowed by way of prima facie under s. 143(1)(a).
(3) Disallowance of Rs. 47,50,079 under s. 43B of IT Act, 1961 :
The AO has observed that the assessee did not furnish the evidence regarding payment of tax, duty and other items covered by s. 43B along with return of income. He has, however, observed that the tax auditors in their report have mentioned the dates of payment of tax and duty, etc. The learned counsel for the assessee invited our attention towards Circular No. 601, dt. 4th June, 1991. It has been clarified in the said circular that if the return of income is accompanied by a certificate from the chartered accountant giving details of payment of tax, etc., made within the time prescribed under s. 139(1), it should be treated as a sufficient compliance of the proviso to s. 43B. The learned Departmental Representative did not dispute the correctness of assessee's submissions that all such outstanding amount, sales-tax, Central sales-tax, P.F., P.P.F., ESI and bonus were paid in the time prescribed under the respective proviso to s. 43B. The Board in a subsequent Circular No. 669, dt. 25th October., 1993, has clarified that if proof of payments of such outstanding tax, duty or workers dues are submitted subsequently, such deductions can be allowed by passing an order under s. 154. Hence, the prima facie adjustments in respect of said sum of Rs. 47,50,079 is also patently wrong.
(4) Disallowance of Rs. 28,75,653 being investment allowance on distillery unit :
The assessee claimed investment allowance in respect of distillery unit. AO has disallowed the same on the ground that the claim of the assessee is not verifiable from the facts on record. The assessee in its application under s. 154 had made detailed submissions to support its contention that the industrial alcohol is not a prohibited item covered under Sch. XI. This point obviously requires detailed investigation. Therefore, this prima facie, adjustment would also fall outside the scope of prima facie adjustment permissible under s. 143(1)(a).
(5) Disallowance of excess depreciation in distillery unit and fertiliser unit : Rs. 2,88,510 :
The AO disallowed the said sum in the original intimation. However, in the rectification order under s. 154, depreciation on office equipment and railway sidings in distillery and fertiliser units was further allowed to the tune of Rs. 2,45,863. The balance disallowance confirmed by the AO in the order under s. 154 also falls outside the scope of prima facie adjustments permissible under s. 143(1)(a). The assessee has given elaborate written submissions in support of depreciation claimed in his application under s. 154 which have not been considered properly by the AO.
(6) Disallowance of Rs. 2,81,938 under s. 37(2A) :
It was explained on behalf of the assessee in his application under s. 154 that 50 per cent. of the total expenditure of Rs. 5,63,875 is attributable to the staff attending to the guests. The expenses attributable to staff falls outside the scope of s. 37(2A). The allowability of such expenses is also debatable one and would fall outside the scope of prima facie adjustments permissible under s. 143(1)(a).
14. We may clarify that the CIT(A) has given a clear finding that the AO will be entitled to examine the question relating to allowability of all such items in the course of regular assessment and he will be free to select the case for sample scrutiny under s. 143(3). The findings which we have given hereinbefore should not be construed as finding on merit of any of the said claims for grant of deduction but such observations have been made by us only with a view to point out that the allowability of such expenses and deductions are debatable and require further investigations, and, hence, those are beyond the scope of prima facie adjustments permissible under s. 143(1)(a).
15. In view of the aforesaid facts and discussions and in view of the elaborate reasons given by the CIT(A) in the order passed by him, we do not find any justification for interfering with the view taken by the CIT(A). The Revenue's appeal has no merit.
16. In the result, both the appeals by the Revenue are dismissed.