Income Tax Appellate Tribunal - Delhi
Delhi Auto And General Finance (P.) Ltd. vs Deputy Commissioner Of Income-Tax on 10 June, 1994
Equivalent citations: [1994]50ITD626(DELHI)
ORDER
A. Kalyanasundharam, Accountant Member
1. The assessee, a limited company, has filed this appeal, aggrieved by the order of CIT (Appeals)-XII, New Delhi, dated 31-12-1993, by which it was held that the assessment proceedings had been validly initiated, and validly made, as contrary to the pleadings of the assessee that the proceedings are illegal and arbitrary. The assessee has also raised several other grounds on various additions and disallowances and on levy of interest under Section 234B of the Act. We shall deal with the issue of the legality of the assessment for which purpose we narrate the facts in brief below.
2. The assessee had filed a return declaring an income of Rs. 6,72,160. This income was so declared under Section 115J of the Act, indicating that the income as computed under the other provisions of the Act was nil. The Assessing Officer (AO) on 11-3-1991 prepared an intimation under Section 143(1)(a) of the Act, accepting the income returned based on Section 115J of the Act. He attached a sheet called 'Adjustment Explanatory Statement' to this intimation. He noted in this sheet the various adjustments giving reasons for each of such adjustments. The claim of the assessee is that the adjustments so made are not in the nature of prima facie adjustments and therefore, though, the Assessing Officer had stated it as an intimation under Section 143(1)(a), it has to be treated as an assessment framed under Section 143(3). Accordingly, the claim advanced had been that the Assessing Officer could not subsequently issue a notice under Section 143(2) for purposes of framing of the assessment. Therefore, the present assessment order is illegal and should be quashed. The content of the said sheet is therefore reproduced below for the sake of convenience and for appreciating the controversy:
Rs. Rs.
Income before adjustment of B.F. losses 54,90,346
Add : Disallowances as under :
Sales tax - for which no evidence
of payment has been filed. Merely
filing of a letter that the same has
been paid before the filing of ret-
urn does not constitute the evi
dence of payment 3,75,125
Similarly Bonus payment evidence
not filed - filed only a letter that the
same has been paid before filing of
return 25,913
Under Section 37(2A) - the expenses are
[30,883-5,000) in nature of enter
tainment 25,883
Deduction under Sections 80G &
80M are not allowable as after
adjustment of B.F. - the gross total
income has been resulted into
NIL 16,700 5,03,621
______ ________
Less : 59,93,967
B.F. Losses as claimed adjusted
to the extent of Income 59,93,967
__________
NIL
Income under Section 115J Rs. 6,72,160
_____________
3. The Assessing Officer issued a notice under Section 143(2) of the Act, dated 14-6-1991, to which the authorised representative of the assessee, responded and on that basis, after considering the evidence and other material on record, the assessment under Section 143(3) of the Act, was framed on 30-3-1993. The Assessing Officer, in this order; had started with the examination of the determination of the book profits under Section 115J of the Act. He objected to the deduction of arrears of depreciation from the book profits, because, it pertained to earlier years, while, the profit and loss account, that was required to be prepared according to the provisions contained in Parts II & III of Schedule VI of the Companies Act, was for a particular year only. He also considered the deduction allowed of bad debt, which he observed is not allowable, because, it related to a business, whose assets and liabilities were taken over only, and since, the income was not included in the hands of the assessee, in an earlier year, the irrecoverable debt, could not be allowed to be deducted from the computation of the income of the assessee. The Assessing Officer accordingly observed that the book profits have been improperly computed.
4. The Assessing Officer proceeded to examine the various aspects of income, deductions, as are necessary, in the making of the computation of the income from business, under the provisions of Sections 28 to 43A of the Act. He accordingly computed the income from business at a figure of Rs. 2,68,82,870. He compared this income with the figure of book profit under Section 115J of the Act, which he arrived at Rs. 60,19,900, by adding back the arrears of depreciation only. Finding that the income as computed under the provisions of Sections 28 to 43A of the Act, and after allowing of deductions under Sections 80G & 80M of the Act, and setting off the brought forward losses, he concluded that the total income of the assessee-company was higher, on which the assessee was liable to pay income-tax, was Rs. 2,68,82,870.
5. The aggrieved assessee challenged the assessment in appeal to the CIT (Appeals)-XII, New Delhi, who had disposed of the same vide his order dated 31 -12-1993. The assessee had challenged the assessment both on its legality & validity and on merits relating to the various additions, treating certain items as incomes as well.
6. The CIT (Appeals), on the claim of illegality and invalidity of the order, considered the following objections of the assessee. First objection was that the intimation dated 11-3-1991 could not be called an intimation, because, it had travelled beyond the prescription in Section 143(1)(a) of the Act and therefore, it had to be construed as an order passed under Section 143(3) of the Act. Therefore, the assessment having been framed once, the Act does not permit framing of a second assessment and hence the present order is an illegal one and must be quashed. The second objection was that the Assessing Officer is required to record reasons for issuing of the notice under Section 143(2) of the Act, in the like manner as is necessary under Section 148(1) of the Act.
7. The CIT (Appeals) had observed that the assessee had neither moved any rectification application, nor had filed any appeal, nor had filed any revision petition to the CIT under Section 264 of the Act, nor had filed any writ before the High Court challenging the validity of the intimation dated 11 -3-1991. CIT (Appeals), however, had called for the reply of the DCIT Spl. Range XVI, New Delhi, on the various objections, in so far as they related to the legality and validity of the assessment made on 30-3-1993.
8. DCIT submitted his reply to the CIT (Appeals), a copy of which was provided to the representative of the assessee. In this reply the Assessing Officer had submitted that the present provisions of Section 143(2) of the Act, as are relevant to the assessment year under appeal, do not require any recording of the reasons before the issue of a notice under that section. He had submitted that the intimation made under Section 143(1)(a) of the Act is without prejudice to the provisions contained in Section 143(2) of the Act and therefore, the Assessing Officer, is empowered to issue a notice under Section 143(2), irrespective of whether intimation had been sent to the assessee or not. In support of his submission, he had extracted observations from the judgment of the Madhya Pradesh High Court, in Kamal Textile v. TTO [1991] 189ITR 339. He also submitted that Section 143(2) does not contain any satisfaction of the prerequisites of recording of reasons, as is necessary before the issue of the notice under Section 148 of the Act. He submitted that the intimation dated 11 -3-1991, could have been made only under Section 143(1)(a) of the Act, which gives the right of initiation of the assessment proceedings by issuing a notice under Section 143(2) of the Act. The Assessing Officer having only followed this procedure, and the assessee having responded, the assessment framed on that basis is, therefore, legal and is valid.
9. CIT (Appeals) had observed that, over the years, the assessment procedure had undergone considerable change to the effect that most of the returns are accepted as correct without any scrutiny and only few cases are selected for scrutiny. He observed that, wherever the assessments are framed without calling for the attendance of the assessee, they are so framed, without application of the mind. He also observed that sending of the intimation under Sections 143(1)(a) & 143(1A) of the Act, is independent of the provisions contained in Sub-section (2) to Section 143 of the Act. He accordingly had observed that the Assessing Officer could send the notice under Section 143(2) even where the intimation had been sent. He accordingly rejected the claim of the appellant on the illegality and invalidity of the assessment and considered the issue on merits.
10. The appellant company has thus come up in appeal before us, challenging the legality and validity of the present assessment and the proceedings thereto. It has also challenged treatment given to certain items of receipts as in the nature of income and certain other items of additions and disallowances.
11. Shri S.L. Batra, the learned Counsel for the appellant company, submitted that there had been several decisions of the Tribunal, where the powers of the Assessing Officer under Section 143(1)(a) had been considered and the consistent view taken is that prima facie adjustments do not include carrying out of such additions or disallowances which require providing the assessee an opportunity of being heard. He contended that the Tribunal had consistently held that application of the provisions of Section 43B do not fall within the ambit of prima facie adjustments. He referred to the adjustment, explanatory sheet attached to the intimation dated 11 -3-1991 and submitted that the Assessing Officer had invoked Sections 37(2A), 43B, 80G and 80M of the Act and finally Section 115J of the Act. He contended that the said intimation could not therefore be construed as one made within the provisions of Section 143(1)(a) of the Act.
12. He referred to the order of the Tribunal in G.L. Verma [ITA No. 6192 (Delhi) of 1991, dated 15-6-1993] - Assessment year 1990-91, and submitted that, it had been clearly held that, the Assessing Officer could not make any disallowances or refuse to give an exemption in the intimation to be made according to Section 143(1)(a) of the Act. He also referred to the decision of the Tribunal in Shadi Lai Enterprises [ITA No. 5 (Delhi) of 1992, dated 24-8-1993] - Assessment year 1991-92, and submitted that, in that case, the Assessing Officer had added to the income the unpaid sales tax by applying Section 43B of the Act, because, the proof of payment was not attached and sent the intimation under Section 143(1)(a) of the Act and it was held that, such disallowances or additions do not fall within the prima facie adjustments. He contended that, it was held that, deficiency of proof could only be cured by issue of the notice under Section 143(2) of the Act. He submitted that the assessee-company had attached the certificates from its auditors, who had verified the payments of sales tax and the bonus and had certified the dates of payment, the amounts and the cheque numbers and this was sufficient evidence for the allowing of deduction of the two items. He again drew our attention to the order of the Tribunal in Shadi Lai Enterprises' case [supra] and submitted that, the Tribunal had held that, such certificates are sufficient information.
13. He referred to the decision of the Bombay High Court in Khatau Jhunkar Ltd. v. K.S. Pathania [1992] 196 ITR 55 and contended that, it had been held that, the phrases "prima facie admissible" & "prima facie inadmissible", do not cover adjustments or disallowances that call for further information from the assessee. He contended that, in this decision, after considering the circulars of CBDT bearing numbers 549, dated 31-10-1989 & 581, dated 28-9-1990, it was held that rectification applications or revision petition are not adequate alternative remedies to intimation made under Section 143(1)(a) of the Act, which contained various wrong disallowances. He contended that, it was held in this decision that, no prejudice would be caused to the revenue, if they accept the return of the assessee, because it is always open to the Assessing Officer to issue a notice under Section 143(2) of the Act and frame an assessment on that basis.
14. Shri Batra submitted that the order, as framed by the Assessing Officer, clearly shows that it is not so made within the meaning of Section 143(1)(a) of the Act. He contended that, merely because, the Assessing Officer has styled it as an intimation, its true character does not change, which is that it is an order framed under Section 143(3) of the Act, though. it was not preceded by a notice under Section 143(2) of the Act. He contended that the order dated 11 -3-1991, is still effective, because, it has not been cancelled by any superior authority and therefore, the. Assessing Officer is precluded from framing a second assessment for the same assessment year. He contended that the present assessment proceedings and the order framed on that basis are illegal and invalid and deserve to be quashed.
15. The learned senior departmental representative Smt. Surabhi Sinha, filed copies of the certificates of the auditors on the payments of sales tax and the bonus to employees, the intimation dated 11-3-1991 along with the adjustment explanatory sheet and the rectification application moved by the assessee, received by the office of Assessing Officer on 17-9-1991. She submitted that the assessee had moved its application for rectification only after the notice under Section 143(2) was served on it. She submitted that the perusal of the records of the Assessing Officer does not indicate that any action had been taken on the rectification application.
16. She contended that perusal of the adjustment explanatory sheet reveals that these are mere calculations only, because ultimately the returned income though based on Section 115J of the Act was only accepted. She vehemently opposed the plea advanced by the counsel for the appellant Shri Batra that the order dated 11-3-1991, is not an intimation made under Section 143(1)(a) of the Act. She contended that the adjustment so noted by the Assessing Officer in the adjustment sheet could only be called as adjustments if the Assessing Officer had raised any demand of tax and not otherwise. She contended that the action of the Assessing Officer in the adjustment explanatory sheet indicates that they are mere calculations to check up whether the assessee was justified in filing the return by adopting the book profit as the basis for its income for the assessment year under appeal. She contended that the Assessing Officer had to indicate that the income as computed under the provisions of the Act is lower than 30 per cent of the book profits, which only had been done by him. She contended that it is necessary to appreciate the substance of the intimation rather than its form because no grievance could be said to have been caused to the assessee, for there had been no additional tax levied on the assessee. She contended that the allegation of the assessee that credit for tax paid, etc., has not been given properly, is a matter of rectification only and cannot be treated as equivalent to raising of additional demand of tax. She contended that wherever, the returned income has been the basis for sending of the intimation, though, it might contain certain adjustments, like the one in the instant case, they all are well within the provisions of Sections 143(1)(a) and 143(1A) of the Act.
17. She pleaded that the cases relied upon by the assessee are all cases where, consequent to the adjustments made, additional demand of tax was raised on the assessee. Since the result of the adjustments was some tax, the courts had held that such adjustments, that call for additional information, could not have been covered under prima facie adjustments. She referred to the adjustment explanatory sheet, and submitted that she would have readily conceded to the claim of the appellant company, had the adjustment been intended to be given effect to, or had been given effect to, by raising of additional demand of tax. She submitted that calculations made for the satisfaction of the Assessing Officer, before issue of the intimation accepting the returned income, under no circumstance could be given the same treatment as the one that has resulted in additional demand of tax. She contended that any working made by the Assessing Officer, that does not result in any demand of tax, are mere calculations only.
18. She contended that Section 43B of the Act requires filing of the proof of payment and the certificates of the auditors could under no circumstances be taken as a substitute for the proof of the payment. She contended that the present procedure of issuing of the intimation is with a view to adjust the taxes paid by the assessees, by treating the intimation, as in the nature of a demand notice as is usually raised under Section 156 of the Act. This was so done by the Assessing Officer in the intimation dated 11 -3-1991 and therefore, it remains an intimation only. In support of these submissions, she placed reliance on the Delhi High Court in Modi Cement Ltd. v. Union of India [1992] 193 ITR 91.
19. She extensively referred to the memorandum explaining the provisions of Section 143 of the Act, as was introduced, and submitted that the intention behind the scheme of procedure was to concentrate on few cases of importance and do away with examination in several others. She contended that the plain reading of Section 143(1)(a) shows that its contents or procedures are without prejudice to what is contained in Section 143(2) of the Act and that the Assessing Officer always reserves a right to issue a notice under Sub-section (2), to any assessee, if he feels like scrutinising the return of any assessee. She contended that her submissions are supported by the decision of the Bombay High Court in Khatau Jhunkar's case (supra) where it was held that, it is open to the Assessing Officer to issue a notice under Section 143(2), whenever he pleases, whether, he had sent an intimation to the assessee or not. She submitted that the MP High Court in Kamal Textiles' case (supra) had examined the vires of the section and had held it to be validly enunciated. She cited two decisions of Delhi Court, where the writ petitions challenging the intimation under Section 143(1)(a) had been dismissed. She pleaded that, she having shown that, the Assessing Officer had only sent the intimation dated 11-3-1991 and therefore, it has to be held that the present proceedings have been validly initiated and the order of assessment is also legal and valid.
20. We have heard the rival submissions, perused the Finance Bill by which the said sections were amended and introduced and the circular of the CBDT bearing number 549 dated 31 -10-1989. We reproduce below the sections, the memorandum explaining the said provisions and the two circulars of the CBDT (supra), for the sake of convenience and evaluating the controversy, in its true perspective.
21. Section 143(1)(a)- Where a return has been made under Section 139, or in response to a notice under Sub-section (1) of Section 142!
(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of Sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under Section 156 and all the provisions of this Act shall apply accordingly; and
(ii) if any refund is due on the basis of such return, it shall be granted to the assessee:
Provided that in computing the tax or interest payable by, or refundable to the assessee, the following adjustments shall be made in the income or loss declared in the return, namely:
(i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified;
(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed;
(iii) any loss carried forward, deduction, allowance or relief, which, on the basis of information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed:
Provided further that where adjustments are made under the first proviso, an intimation shall be sent to the assessee, notwithstanding that no tax or interest is found due from him after making the said adjustments:
Provided also that an intimation for any tax or interest due under this clause shall not be sent after the expiry of two years from the end of the assessment year in which the income was first assessable.
22. Section 143(1 A)(a) Where, in the case of any person, the total income, as a result of the adjustments made under the first proviso to Clause (a) of Sub-section (1), exceeds the total income declared in the return by any amount, the Assessing Officer shall,
(i) further increase the amount of tax payable under Sub-section (1) by an additional income-tax calculated at the rate of twenty per cent of the tax payable on such excess amount and specify the additional income-tax in the intimation to be sent under Sub-clause (t) of Clause (a) of Sub-section (1).
23. Section 143(2) - Where a return has been made under Section 139, or in response to a notice under Sub-section (1) of Section 142, the Assessing Officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in arty manner, serve on the assessee a notice requiring him, on a date to be specified therein, either to attend his office or to produce, or cause to be produced there, any evidence on which the assessee may rely in support of his return:
Provided that no notice under this sub-section shall be served on the assessee after the expiry of the financial year in which the return is furnished or the expiry of six months from the end of the month in which the return is furnished, whichever is later.
24. Section 143(3) - On the day specified in the notice issued under Sub-section (2), or as soon afterwards as the case may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him on the basis of such an assessment.
25. Memorandum explaining the provisions of Sections 143(1) & 143(1 A) -Clause 48 seeks to substitute a new section for the existing Section 143 relating to procedure for assessment.
Under the existing provisions of the section, after a return of income has been filed, the Income-tax Officer may make an assessment under Sub-section (1) without requiring the presence of the assessee or production by him of any evidence in support of the return. Where the assessee objects to such an assessment or where the Income-tax Officer is of the opinion that the assessment so made is incorrect or incomplete, or in a case where the Income-tax Officer does not complete the assessment under Sub-section (1), but wants to make an enquiry, a notice under Sub-section (2) may be issued to the assessee requiring him to produce evidence in support of his return. After considering the material and evidence produced by the assessee and after making necessary enquiries, the Income-tax Officer makes an assessment under Sub-section (3) of the section.
This section is proposed to be completely recast to provide for a new scheme of assessment wherein the requirement of passing an assessment order in all cases where returns are filed is dispensed with.
Clause (a) of Sub-section (1) of the new section provides that where a return has been filed under Section 139 or under Sub-section (1) of Section 142
(i) if any tax or interest is found due on the basis of such return, an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under Section 156, and
(ii) if any refund is due on the basis of such return, it shall be granted to the assessee.
A proviso to the aforesaid clause allows the department to make certain adjustments in the returned income or loss.
Clause (b) of Sub-section (1) of the new section provides that where as a result of any of the appellate, revisionary or settlement order mentioned in the clause relating to any earlier assessment year and passed subsequent to the filing of the return referred to in Clause (ii), there is any variation in the carry forward loss, deduction, etc., claimed in the return, then,
(i) if any tax or interest is found due, and intimation shall be sent to the assessee specifying the sum so payable, and
(ii) if any refund is due, it shall be granted to the assessee. However, intimation for any tax or interest due under this clause shall not be sent after the expiry of four years from the end of the financial year in which such order was passed.
Sub-section (2) of the new section provides that when the Assessing Officer considers it necessary or expedient to verify the correctness or completeness of the return, to ensure that the income has not been understated or the loss declared is not excessive, or the tax has not been underpaid, he shall serve on the assessee a notice either to attend his office or to produce on a date specified any evidence on which the assessee may rely in support of the return.
A proviso to the sub-section provides that such a notice can be served on the assessee only during the financial year in which the return is filed or within six months from the date of filing the return, whichever is later.
Sub-section (3) provides that after hearing such evidence as the assessee may produce in response to notice under Sub-section (2) and such other evidence as the Assessing Officer may require on specified points and after taking into account all relevant material which the Assessing Officer has gathered, he shall pass an assessment order in writing determining the total income or loss of the assessee and the sum payable by him on the basis of such assessment order.
26. CBDT Circular No. 549, dated 31-10-1989 5.1 The new scheme of assessment (new Section 143) With the number of income-tax assessees continuously increasing, there was an urgent need to reduce the Department's work load by greater reliance on voluntary compliance by the assessees. The Amending Act, 1987, has, therefore, substituted a new Section 143 in the Income-tax Act to introduce an entirely new scheme of assessment after a return of income has been filed. The main features of the new scheme are :
(i) The requirement of passing an assessment order in all cases, where returns of income are filed, has been dispensed with and the issue of an acknowledgement slip to the assessee will be the end of the matter, if he has correctly paid tax and interest, if any, due on the basis of the return.
(ii) If on the basis of the return any amount is found due from the assessee, it can be recovered; if any refund is found due to the assessee, it can be granted without passing an assessment order.
(iii) Assessment orders will be passed only in a very limited number of cases selected for scrutiny.
5.2...
5.3 Adjustments to be made to the income or loss declared in the return A proviso to Clause (a) of Sub-section (1) of the new section enables the Department to make the following adjustments to the returned income or loss for purposes of computing tax or interest payable by or refundable to the assessee:
(i) rectification of any arithmetical errors in the return or in the accompanying accounts or documents;
[ii) allowance or disallowance of 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.
5.4 The prima facie adjustments mentioned at (ii) above can be made 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 admissibles or inadmissibles in respect of which adjustments can be made to the returned income or loss are:
(i) While computing the income under the head "Salaries", standard deduction under Section 16(0 is not claimed, or claimed at a figure which is less than or in excess of the permissible limit.
(ii) While computing the income under the head "Income from house property", deduction for 1/6th for repairs or for a new unit under the proviso to Section 23(1) is not claimed, or claimed at a figure which is less than or is in excess of the permissible amount.
(iii) While computing the income under the head "Profits and gains from business or profession", depreciation is claimed at rates lower or higher than those provided for in the Income-tax Rules.
(iv) While computing the capital gains, deduction of Rs. 10,000 under Section 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 from business or profession", carried forward and set off against the current income.
(vii) Carried forward loss of business set off against income of current year under other heads.
(viii) Old loss of more than eight assessment years set off against the current income, if the information is available in the return or the accompanying documents.
(ix) Deduction under Section 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 document accompanying the return, or claimed at a figure which is less than or is in excess of the permissible amount.
(x) Deduction under Section 80L not claimed or claimed at a figure which is less than or is in excess of the permissible amount.
(xi) Deduction under Section 80G not claimed though allowable on the basis of the information available in the return of income or the accompanying documents, or claimed at a figure which is less than or in excess of the permissible amount.
(xii) Deduction under Section 80M claimed at 60 per cent of gross dividend instead of net dividend 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.
5.5...
5.6...
5.7 Insertion of Sub-section (1A) in Section 143 by the Amending Act, 1989, to provide for charge of additional tax where returned income is increased as a result of adjustment made under Section 143(1)(&) The new Section 143, as substituted by the Amending Act, 1987, while dispensing with the necessity of passing an assessment order in all cases, did not contain any deterrent provision against filing of incorrect returns to show lesser tax liabilities. Consequently, the new scheme of assessment was liable to be misused by unscrupulous taxpayers, who might return lesser income by making obvious mistakes or by claiming obviously incorrect deductions and taking a chance that if the same are detected by the Department, they would have to pay the correct tax only. The Amending Act, 1989, has, therefore, inserted a new Sub-section (1A) in the section to provide for the levy of 20% additional tax in such cases. Besides its deterrent effect, the purpose of this levy is also to persuade all the taxpayers to fill their returns of income carefully to avoid mistakes. It is, thus, a sort of negligence tax on the assessee and compensates the Department for the effort involved in detecting the obvious mistakes committed by the taxpayers in their returns of income or loss. The provisions are discussed in greater detail in the following sub-paragraphs.
5.8...
5.9...
5.10...
5.11...
5.12 Since, under the provisions of Sub-section (1) of the new Section 143, an assessment is not to be made now, the provisions of Sub-sections (2) and (3) have been recast and are entirely different from the old provisions. A notice under Sub-section (2), which will be issued in cases picked up for scrutiny, is now issued only to ensure that the assessee has not understated his income or has not computed excessive loss or has not underpaid the tax in any manner while furnishing his return of income. This means that, under the new provisions, in an assessment order passed under Section 143(3) in a scrutiny case, neither the income can be assessed at a figure lower than the returned income, nor loss can be given in except what was due on the basis of the returned income, and which would have already been allowed under the provisions of Section 143(1)(a)(#).
5.13 A proviso to Sub-section (2) provides that a notice under the subsection can be served on the assessee only during the financial year in which the return is furnished or within expiry of six months from the end of the month in which the return is filed, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if a case is picked up for scrutiny. It follows that if an assessee, after furnishing the return of income does not receive the notice within the aforesaid period, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return.
5.14 The provisions of Sub-section (3) of the new section have also been simplified to provide for passing an assessment order under this subsection only under one circumstance, that is, where a notice under Sub-section (2) has been issued to the assessee picked up for scrutiny. As already explained, since in an assessment completed under the new Sub-section (3), neither the returned income can be assessed at a lower figure, nor can a further refund be granted, the words "or refundable to the assessee". which were there in old Sub-section (3), do not find place in the new sub-section.
5.15 Whether in a case picked up for scrutiny an intimation or refund under Section 143(1)(a) should be issued before completion of assessment under Section 143(3) A question has been raised as to whether in a case selected for scrutiny an intimation under Section 143(1)(a) for any tax or interest found due from the assessee, or a refund under Section 143(1)(a)(ii) found due to the assessee on the basis of the return of income or loss should be issued immediately and before completion of a regular assessment under Section 143(3). In this connection, it may be pointed out that the scheme of the new Section 143 is such that action under Section 143(1)(a) must be taken soon after the filing of the return to avoid delay in
(i) collection of demand which is clearly due on the basis of the return, or
(ii) issue of refund due on the basis of the return, failing which the Government would have to pay interest at 1.5% per month under the provisions of new Section 244A (refer to paras 11.1 to 11.9 in these explanatory notes).
Once the case is picked up for scrutiny, the Department would normally get more than two years for completion of regular assessment under Section 143(3). Therefore, collection of demand due or issue of refund due on the basis of the return need not wait for such a long period. It may further be pointed out that no refund can now be granted on completion of an assessment under the provisions of Section 143(3). For this reason also, action under Section 143(1)(a)(ii) for issue of a refund on the basis of a return of income or loss must be completed before the assessment order under Section 143(3) is passed in that case, as otherwise the provisions of Sections 143(1)(a)(ii) and 143(3) would get mixed up and may create confusion and uncertainty.
5.16 From the above discussion, it follows that even in cases selected for scrutiny it is desirable that action under Section 143(1)(a) for issue of an intimation for any sum due from the assessee or for issue of a refund due to the assessee on the basis of the return must be completed soon after the filing of the return and in any case before completion of assessment under Section 143(3). In fact, it is preferable if action under Section 143(1)(a) is completed even before the issue of a notice under Section 143(2) in such cases.
5.17 Whether any appeal is provided against and adjustment made under the proviso to Section 143(1)(a) or levy of additional income-tax under Section 143(1 A) A direct appeal has not been provided against adjustments made under the proviso to Section 143(1)(a) and the consequential charge of additional income-tax under Section 143(1 A), because adjustments are to be made only in respect of arithmetical errors and prima facie admissibles or inadmissibles. Any action of the Assessing Officer in contravention of these provisions will be clearly a mistake. Therefore, Section 154 relating to the rectification of mistakes has been amended to bring an intimation/refund issued under Section 143(1) within the purview of that section (refer to para 9.1 of these explanatory notes). Therefore, if an assessee is aggrieved by an adjustment made to the returned income/loss and also the consequential charge of additional income-tax, he can move an application under Section 154 before the Assessing Officer for rectification of mistake. If the said application is rejected, the assessee can file an appeal or revision against such order or rejection. Thus, in effect, an adjustment made under the proviso to Section 143(1)(a) or additional income-tax charged under Section 143(1 A) are appealable, though not directly but through the provisions of Section 154.
5.18...
27. The perusal of the provisions of Section 143(1)(a) and Sub-section (1A) to Section 143 of the Act indicate that they are primarily intended towards adjustment of taxes as are paid by the assessee, based on the return of income filed by him either under Section 139(1) or under Section 142(1). The second purpose is to carry out prima facie adjustments so as to make sure that the total income as indicated in the return of income is correct and to carry out correction for any arithmetical errors, wrong claim of loss or deduction admissible but not so made and claims that are inadmissible but, have been deducted from the total income, so as to ensure that the assessees do not get away by paying taxes lower than what they ought to have paid. The purpose of sending the intimation to the assessee, is a form of raising the demand of tax on the assessee, and is stated to be similar to the serving of a notice of demand as is normally made under Section 156 of the Act. In addition, it also provides for recovery of additional tax to the tune of 20%, in the event of the adjustment resulting in the increase of the income or in the reduction of the losses.
28. The AO had computed the income with reference to the profits as per profit and loss account of the assessee-company and had made certain disallowances for want of proof, for entertainment expenses and non-allow ability of deductions under Sections 80G & 80M, because, there was no income available after the set off of the brought forward losses. He had then determined the book profit under Section 115J of the Act and calculated 30% of it and adopted it as income. He had accordingly shown the income under Section 115J in his intimation under Section 143(1)(a) of the Act, which was the income as returned by the assessee-company.
29. The AO, though, had carried out certain disallowances in computing the income but had not given effect to them by raising any demand of tax. He had in fact accepted the returned income, though, it was so made by invoking Section 115J of the Act. It is an admitted position that, due to the said intimation, no prejudice had been caused to the assessee in the shape of imposing upon it any additional demand of tax because there had been no additions to the returned income. In these circumstances, we find lot of force in the argument of the learned senior departmental representative Smt. Surabhi Sinha that the adjustments, as made in the adjustment explanatory sheet, if do not result in any addition to the returned income, resulting in some demand of tax, they are to be construed as in the nature of mere calculations only. We also find lot of force in her argument that Section 143(1) could be invoked in all cases for sending the intimation, accepting the returned income whether it results in additional demand of tax or not.
30. What we are required to examine is that whether the modified procedure of assessment, by sending intimation initially, followed by selective scrutiny, by issuing a notice under Section 143(2) of the Act, would cover, even those cases, where the returns of income have been filed with reference to the income as stated in Section 115J of the Act ?
31. The modified procedure as provided for, read with the memorandum explaining the provisions, on the face of it indicates that the intention is to cover all cases where complete information is available along with the return, explaining the various sources of incomes, deductions, exemptions, etc., duly supported by necessary evidences. As had been provided for in the memorandum explaining the provisions and the circular of the CBDT (supra), the prima facie admissibles and inadmissibles, are those, that do not call for the presence of the assessee to explain them, which are part of the record of the AO and involve arithmetical errors of excess deduction or exemption claimed or of less deduction or exemption claimed.
32. In our view the intimation procedure covers the following circumstances. First, accepting the return as it is, if it does not contain any prima facie admissibles not claimed or claimed less or if it does not contain any prima facie inadmissibles that are either claimed, or claimed in excess of the allowable limit. This does not involve any additional demand of tax. Secondly, carrying out of adjustments for prima facie admissibles not claimed or claimed less and prima facie inadmissibles claimed or claimed in excess of the allowable limit. This might involve, either demand of tax or refund of tax, depending upon, further deduction allowed for prima facie admissibles or reduction in allowance of deduction for prima facie inadmissibles.
33. Section 115J of the Act, as had been introduced, is a presumptive income provision, which is to be invoked in certain circumstances. This is aptly clear from Sub-section (1) of that section, which we reproduce below for the sake of facility.
Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company other than a company engaged in the business of generation or distribution of electricity, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 but before the 1st day of April, 1991 (hereinafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profits, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
34. The said section is to be invoked when the income computed under the Act, for and from the assessment year 1988-89, on being compared with thirty per cent of the book profit, is found to be less. Then, the income on which the assessee, would be chargeable to tax, for that assessment year, shall be deemed to be equal to thirty per cent of the book profit. In addition, Sub-section (1A), read with the Explanation requires that the book profits would be based on the profit & loss account prepared in accordance with the provisions of Parts II & III of Schedule VI of the Companies Act and then, requires certain adjustments to the book profits, by way of additions and deductions.
35. There are few steps to be covered before the said section could be applied to a case. First, the total income must be computed under the Act. Secondly, the book profits must be drawn from the profit & loss account prepared in accordance with the provisions of Parts II & III of Schedule VI of the Companies Act. Thirdly, such book profits, must be adjusted for certain items as indicated in the Explanation. Fourthly, calculation of thirty per cent of the adjusted book profits. Fifthly, comparison of the total income as computed in step 1 with the thirty per cent of the book profits as in step 4. Lastly, deeming thirty per cent of the book profits as in step 4, as the total income chargeable to tax, only if it exceeds the total income as computed in step 1. It is necessary to appreciate that it is only when the income as computed under this Act is found to be less than thirty per cent of the book profits that, for the assessment year from 1988-89, it is presumed that the total income for that assessment year shall be thirty per cent of the book profits. When the income for the assessment year is presumed to be thirty per cent of the book profits then all other provisions of this Act have been made inapplicable in so far as they relate to the determination or computation of income from business. To put it in other words, the total income for the assessment year, is presumed to be thirty per cent of the book profits.
36. Section 115J does not allow any option to the AO, because if he finds that the total income as computed under the Act is less than thirty per cent of the book profits, then, he has to necessarily presume that the total income for the assessment year is such thirty per cent of the book profits. The application of the provisions of Section 115J of the Act, is thus subject to the primary condition that the income computed under the Act is found to be lesser than the thirty per cent of the book profits. Therefore, the AO has to show that he has satisfied the primary condition, which could be so shown only when he computes the income under the Act, by applying the various provisions of the Act from Sections 28 to 43A, 70 to 74, 80, 80A to 80Z and Section 145, etc., after evaluating each and every circumstance and the Act, as would be relevant for each of those sections. It is for this purpose that Section 143(2) of the Act has been enacted, which reads, the Assessing Officer shall, if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice. The memorandum explaining the issuing of such notice, has stated - when the Assessing Officer considers it necessary or expedient to verify the correctness or completeness of the return, to ensure that the income has not been understated or the loss declared is not excessive, or the tax has not been underpaid, he shall serve on the assessee a notice.
37. Section 143(2) clearly indicates that, in all situations, where the provisions of Sections 143(1)(a) & 143(1A) have been applied, the Assessing Officer has not to carry out any action that would lead to the conclusion that he has satisfied himself of either the correctness or the completeness of the return, with a view to make sure that the income has not been understated. We had observed earlier that Section 115J of the Act requires the satisfaction of the Assessing Officer that the income as computed under the provisions of the Act, is less than thirty per cent of the book profits, which could be so arrived at only after he carries out the examination of the return, for its completeness or correctness, and makes sure that the income has not been understated. Section 115J of the Act requires examination of the accounts for arriving at the primary satisfaction that, they have been so prepared in accordance with Parts II & III of Schedule VI of the Companies Act. This examination of accounts is not a formality, for it requires comprehensive knowledge of the Companies Act and therefore, it could not be said that acceptance of a return based on Section 115J of the Act, without any examination of the accounts, could be covered under the scheme of intimation, followed by selective scrutiny subsequently. Therefore, in final analysis, we are of the confirmed opinion that in cases, where returns are filed presuming the thirty per cent of the book profits as the income for the assessment year, the proper course open to the Assessing Officer is to issue the notice under Section 143(2) of the Act.
38. The adjustment explanatory sheet shows that the AO had carried out application of certain sections, which call for restriction in allowing of expenditures as deductions, in the computation of income, applied the provisions relating to set off of the carried forward of unabsorbed business loss and has also applied the provisions relating to allowing of deductions from the gross total income, for donations under Section 80G and in respect of inter-corporate dividend under Section 80M of the Act. Some of these adjustments, like the one made under Section 43B, for non-filing of the proof of payment of sales-tax, have been held by Courts, as not permissible, because they involve calling for further information from the assessee. The Bombay High Court in Khatau Junkar Ltd, 's case (supra) and the Delhi High Court in SRF Ltd.'s case, had held that, prima facie adjustments do not include making of disallowances that call for further information from the assessee. Certain other adjustments like the adjustment of carried forward losses, whether, could be made before deductions as are permitted under Chapter VI-A (like deductions under Sections 80G, 80M in the instant case), or after, have been subjected to judicial controversy, indicating that they could not fall within the purview of prima facie adjustments. Likewise, the quantum of deduction permissible with reference to Section 80M and especially, when the income is a loss, had also been controversial, that had compelled the CBDT, to issue circular No. 58, dated 15-4-1971. By means of this circular, the Board had clarified that deduction under Section 80M has to be related to the quantum of dividend included in the gross total income and not with reference to the income that is remaining finally, after set off of the losses. This also indicates that the adjustment as carried out by not allowing deduction under Section 80M, by stating that, there remains a nil income, is not in line with the directives of CBDT, and hence, could not be held to be prima facie adjustment. From this point of view, it is clear that the adjustments as made in the adjustment explanatory sheet, which could not have been so made, when sending intimation to the assessee, though such adjustments did not result in additional tax liability, have to be treated not as mere calculations. When the said adjustments could not be construed as mere calculations, but as adjustments that are not so permitted, then, the obvious conclusion is that the order dated 11 -3-1991 could no longer be termed as intimation with the meaning of Sections 143(1)(a) and 143(1A) of the Act.
39. Since the AO had invoked Section 115J of the Act, after satisfying himself that the income computed under the Act is a loss in the adjustment explanatory sheet and that the income has to be presumed at thirty per cent of the book profits, it has to be concluded that the AO had by-passed the requirement of issuing a notice under Section 143(2) of the Act, without realising that it is a mandatory procedure. As expressed by us earlier, the AO, before applying the presumptive provision of Section 115J, must show that the said provisions are attracted, for which purpose, he has no other alternative, but to issue the notice under Section 143(2) of the Act.
40. Under the earlier provisions of Section 143(1) of the Act the AO was required to frame an assessment of income, accepting the income as returned, which assessment was also treated as a regular assessment. Accordingly Section 143(2) of the Act required the AO to record his reasons for reopening of an assessment and to obtain the permission in writing from his superior officer, because, it would result in the cancellation of an order of assessment. The new provision of Section 143(3) of the Act permits making of a regular assessment only after the issue of the notice under Section 143(2) of the Act and the intimations sent under Sections 143(1)(a) and 143(1A) of the Act, are not regarded as assessment of incomes, because, they have been intended only for the adjustment of taxes paid on the income returned by an assessee. Since, intimations are merely for the adjustment of the taxes on the returned incomes, the provisions for recording of reasons before the issue of a notice under Section 143(2) of the Act have been dispensed with. This is because it does not result in the cancellation of any order of assessment. The comparison of the old and the new provisions, especially relating to Section 143(2), clearly indicates that an order of assessment could be cancelled only by an authority that is superior to the one that has made the order.
41. The Supreme Court, in Union of India v. T.R. Verma AIR 1957 SC 882, had held that, the quasi-judicial authority, who is required to observe the rules of natural justice, if he does not do so, the order so passed by him would be an invalid order. The rules of natural justice have been evolved through the issuance of a notice under Section 143(2) of the Act, followed by allowing the appellant to place his facts, as are called upon by the AO. The AO, having invoked Section 115J of the Act without issuing a notice under Section 143(2) of the Act, has not followed this rule of natural justice, and therefore, the document dated 11-3-1991 that is titled as an intimation, we are compelled to hold as an order of assessment of income, made without following the rules of natural justice and the mandate of the Act. The Supreme Court in Supdt (Tech.-I) Central Excise v. Pratap Rai [1978] 114 ITR 231, had held that, orders passed, without following the rules of natural justice, being invalid orders, such orders must be struck down as invalid, and must be restored to the point, at which, the invalidity occurred.
42. The document dated 11-3-1991 titled as an intimation which we are compelled to hold as an order of assessment of income made by flouting the rules of natural justice, and without following the mandate of the Act, survives in the light of the Supreme Court decisions [supra), till it is struck down by a superior authority, as an invalid order. Therefore, so long as the order dated 11-3-1991, is not struck down as an invalid order, it is enforceable against the department and thus prevents it from taking any fresh assessment proceeding. In such an eventuality, the present proceedings are invalid proceedings and the assessment so framed on the basis of invalid proceedings is obviously illegal and needs to be quashed. We accordingly quash the present assessment proceedings. We do not accordingly feel the necessity of examining the issue on its merits. The appeal is accordingly allowed in part.