Punjab-Haryana High Court
Commissioner Of Income Tax vs Roadmaster Industries Of India (P) Ltd. on 17 September, 2004
Equivalent citations: (2004)191CTR(P&H)242, [2004]271ITR247(P&H)
Author: N.K. Sud
Bench: N.K. Sud, S.S. Grewal
JUDGMENT N.K. Sud, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal, Chandigarh Bench (for short "the Tribunal"), has referred the following questions of law arising out of its order dt. 16th June, 1980 relating to asst. yr. 1975-76, for the opinion of this Court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the assessee- company was entitled to weighted deduction under Section 35B(1)(b) on expenditure incurred by way of sea freight amounting to Rs. 6,41,758 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in expunging the following portion of the order of the ITO passed under Section 143(3) r/w Section 144B which did not find place in the draft order forwarded to the assessee under Section 144B and approved by the IAC :
'Penalty notices under Sections 271(1)(c), 271(1)(a) and 273(a) have separately been issued. Charge interest under Section 139(8) and under Section 215.'"
2. While disposing of the' reference petition of the Revenue under Section 256(1) of the IT Act, 1961 (for short "the Act"), the Tribunal also accepted the prayer of the assessee to refer a cross-question at its instance. The question, which has been numbered by us as question No. 3, is as under :
"3. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in not giving a finding on merits regarding chargeability of interest under Sections 139(8) and 215 ?"
3. Before coming to question No. 1, we shall first deal with questions Nos. 2 and 3.
Question No. 2 :
4. The facts relating to this question are not in dispute. The assessee filed its return of income on 28lh Oct., 1975 for asst. yr. 1975-76 declaring an income of Rs. 2,28,649. Subsequently, this return was revised on 30th Jan., 1976 showing an income of Rs. 2,03,630 on the basis of audited accounts. Since the ITO during the course of assessment proceedings proposed to make various additions and disallowances resulting in variation in the returned income by an amount exceeding Rs. 1 lakh, he invoked the provisions of Section 144B of the Act. Accordingly, he prepared a draft assessment order incorporating the proposed additions and alterations as required under Section 144B(1) of the Act and forwarded it to the assessee. On receipt of the said draft, the assessee forwarded objections to the proposed additions and disallowances under Sub-section (2) of Section 144B of the Act. The ITO, thereafter, forwarded the draft order together with the objections to the IAC as required by Sub-section (4) of Section 144B of the Act. The IAC, after considering the draft order and the objections, issued directions to the ITO vide his letter dt. 29th Aug., 1977. The ITO, thereafter, passed the final assessment order on 21st Sept., 1977. On receipt of the final assessment order, the assessee found that the following remarks had been incorporated in it by the ITO which had not figured earlier in the draft assessment order:
"Penalty notices under Sections 271(1)(c), 271(1)(a) and 273(a) have separately been issued. Charge interest under Section 139(8) and under Section 215."
Accordingly, the assessee challenged the levy of interest under Sections 139(8) and 215 of the Act and also the initiation of proceedings under Sections 271(1)(c), 271(1)(a) and 273(a) of the Act in the appeal filed before the AAC. The AAC, however, rejected this claim of the assessee by holding that the procedure prescribed under Section 144B of the Act only refers to computation of income or loss and not to the determination of sum payable by or refundable to the assessee. It was further held that tax is computed with reference to income assessed while interest is calculated with reference to the tax determined and, thus, calculation of interest is a stage following the determination of tax. The AAC further observed that in a case where interest is leviable, an order can be passed either along with the assessment order or independently. He, accordingly, held that the direction issued to charge interest was, in fact, an independent order for which procedure prescribed under Section 144B of the Act was not required to be followed. Similarly, the AAC held that it is not necessary that the satisfaction for initiation of penalty proceedings should be recorded in the assessment order itself and it is enough if some evidence in the form of an order-sheet entry or an office note is recorded about his satisfaction before initiating the proceedings. Thus, it was held that the direction of the ITO for issuance of notices under Sections 271 and 273 of the Act could not be termed to form part of the draft assessment order, as contemplated in Section 144B of the Act.
5. On further appeal, the Tribunal held that it was necessary for the ITO to indicate in the draft order that he proposed to levy interest under Sections 139 and 215 of the Act and also that the proceedings under Sections 271 and 273 were proposed to be initiated. According to the Tribunal, in the absence of such an indication, the assessee may accept an addition/disallowance without the knowledge of the consequences that are going to follow. This, as per the Tribunal, would be in gross violation of principles of natural justice. The Tribunal, accordingly, expunged the observations of the ITO regarding penalty under Sections 271(1)(c), 271(1)(a) and 273(a) of the Act and interest under Sections 139(8) and 215 of the Act.
6. Dr. N.L. Sharda, learned counsel for the Revenue, relied on the reasoning given by the AAC.
7. Mr. Sanjay Bansal, learned counsel for the Revenue (sic-assessee), on the other hand, supported the order of the Tribunal. He placed strong reliance on the decision of the Gujarat High Court in CIT v. Maharaja Exhibitors (2001) 251 ITR 767 (Guj), wherein the challenge of the assessee to levy of interest and initiation of penalty proceedings has been upheld under identical circumstances.
8. We have heard the counsel for the parties and have perused the orders of the authorities below.
9. Before adverting to the dispute, we may refer to the provisions of Section 144B of the Act which were in force at the relevant time. The said section is reproduced hereinbelow :
"144B. (1) Notwithstanding anything contained in this Act, wherein, in an assessment to be made under Sub-section (3) of Section 143, the ITO proposes to make any variation in the income or loss returned which is prejudicial to the assessee and the amount of such variation exceeds the amount fixed by the Board under Sub-section (6), the ITO shall, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the assessee.
(2) On receipt of the draft order, the assessee may forward his objections, if any, to such variation to the ITO within seven days of the receipt by him of the draft order or within such further period not exceeding fifteen days as the ITO may allow on an application made to him in this behalf.
(3) If no objections are received within the period or the extended period aforesaid, or the assessee intimates to the ITO the acceptance of the variation, the ITO shall complete the assessment on the basis of the draft order.
(4) If any objections are received, the ITO shall forward the draft order together with the objections to the IAC and the IAC shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the ITO to enable him to complete the assessment :
Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the assessee to be heard. (5) Every direction issued by the IAC under Sub-section (4) shall be binding on the ITO.
(6) For the purposes of Sub-section (1), the Board may, having regard to the proper and efficient management of the work of assessment, by order, fix, from time to time, such amount as it deems fit :
Provided that different amounts may be fixed for different areas :
Provided further that the amount fixed under this sub-section shall, in no case, be less than twenty-five thousand rupees. (7) Nothing in this section shall apply to a case where an IAC exercises the powers or performs the functions of an ITO in pursuance of an order made under Section 125 or Section 125A."
10. This section was inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st April, 1976. It had been incorporated in pursuance of a recommendation made by the Wanchoo Committee. The following relevant portion of the report of the Committee clearly mentions the objects with which it was enacted :
"As regards disputed additions in assessment, a point has been made before us that often decisions are taken by the ITO behind the assessee's back and the assessee comes to know of additions and disallowances only after the assessment has been made and an order is received by him. In many cases, the dispute could have been avoided if adequate opportunity had been given to the taxpayer to explain the position. We are aware that such situations do frequently arise. To ensure that the assessee gets a reasonable opportunity of meeting the objections of the ITO before an assessment is finalised, we recommend that there should be a provision in the law requiring the ITO to send a draft assessment order to the assessee....." (Emphasis, italicised in print, supplied).
11. From a reading of the provisions of Section 144B of the Act in the light of the objects with which it was enacted, it is clear that the intention of the legislature was to avoid multiplicity of proceedings and unnecessary appeals. Under the procedure prescribed under Section 144B of the Act, the assessee gets an opportunity to represent his case against the additions/disallowances proposed to be made by the AO in the returned income or loss before a superior authority. If the objections of the assessee to the proposed additions/ disallowances are genuine, it would not only result in reduction of litigation but also obviate undue hardship of the assessee because in that event, the IAC would direct the AO not to make the proposed changes. This provision, therefore, is a restraint on the AO from passing a rash, arbitrary or vindictive order.
12. We may now examine the scheme of Section 144B of the Act. Sub-section (1) comes into play in cases where the ITO proposes to make "any variation in the income or loss returned" and the amount of such variation exceeds the amount fixed by the Board under Sub-section (6). It is not in dispute that that amount fixed by the Board for this purpose is Rs. 1 lakh. Thus, whenever the ITO proposes to make additions or disallowances resulting in enhancement of income or reduction in loss by more than Rs. 1 lakh, he has to forward a draft of the proposed order of assessment to the assessee. Sub-section (2) entitles the assessee to forward his objections, if any, "to such variation" to the ITO within the period specified thereunder. Sub-section (3) provides that if no objections are received within the stipulated period or where the assessee intimates to the ITO the acceptance of the "variation", the ITO shall complete the assessment on the basis of the draft order. However, in case, objections are received from the assessee by the ITO, then, as per Sub-section (4), he is required to forward the draft order along with the objections to the IAC, who after considering the draft order and objections and after going through the record relating to the draft order, shall issue directions as he thinks fit "in respect of the matters covered by the objections". This subsection also provides that before issuing any directions which are prejudicial to the assessee, an opportunity of being heard is given to the assessee. Sub-section (5) provides that the directions issued by the IAC under Sub-section (4) shall be binding on the ITO. Sub-section (6) empowers the Board to specify the amounts of variation for different areas for the purpose of Sub-section (1). This, however, is subject to the rider that in no cases, the specified amount shall be less than Rs. 25,000. Sub-section (7) excludes cases where the IAC exercises the powers or performs the functions of an ITO.
13. From the above, it is clear that this provision deals with the quantification of the income or loss. This is evident from a reading of Sub-section (1) that a draft order is to be sent where the ITO proposes to make "any variation in the income or loss returned". It becomes further clear from Sub-section (2) that the assessee can forward his objections only "to such variation". Sub-section (4) also shows that the IAC can only issue directions in respect of "matters covered by the objections". It is, thus, clear that the entire procedure prescribed in this section deals with the additions/disallowances proposed by the ITO. However, before such additions/disallowances result in the final assessment, the assessee has been provided a higher forum to object to the additions/disallowances if the same result in variation in income or loss by more than Rs. 1 lakh. Even the apex Court in R. Dalmia and Anr. v. CIT (1999) 236 ITR 480 (SC), has observed that "Section 144B provides a measure of protection to the assessees--that substantial variations, prejudicial to them, should not be made in their returned incomes only by the ITOs : these should be made only after consideration by the IACs". It is also clear from Sub-section (3) that the draft order is not an assessment order, because even if the assessee does not file any objections against the same or even if he intimates his acceptance of the proposed additions/disallowances, even then the ITO is required to complete the assessment on the basis of the draft order. Thus, the draft order is not an order of assessment but an order quantifying the income or loss. The ITO cannot vary the quantum while completing the assessment but has not been debarred from exercising all other powers vested in him for the completion of an assessment. Neither direction to levy interest nor initiation of penalty proceedings can result in "any variation in the income or loss returned". Thus, there is no scope for the assessee to object to levy of penal interest or to initiation of penalty proceedings as Sub-section (2) entitles it only to raise objections to the "variation" proposed by the ITO in the draft order. When the assessee is not entitled to raise any objections to such directions, then obviously the IAC has also no power to issue any directions in respect thereof. His power to issue directions as per Sub-section (4) is restricted to the "matters covered by the objections".
14. Viewed in this light, finding of the Tribunal that failure to intimate the assessee in the draft order about proposal to levy interest or to initiate penalty proceedings, led to gross violation of principles of natural justice, cannot be sustained as the assessee had no right to raise any objections in respect of such an action under Section 144B of the Act. If the draft order was meant to be a full-fledged assessment order, then, there was no need for providing for completion of assessment on the basis of the draft order even in cases where no objections are received from the assessee or where the assessee intimates his acceptance of the proposed variation. It could have easily been provided that the draft order shall be treated as an assessment order. Section 144B of the Act does not place any bar on the other ancillary powers of the ITO which he is competent to exercise during the assessment proceedings or at the time of completion of assessment. Direction to levy penal interest and initiation of penalty proceedings are two such powers. The AAC has correctly appreciated the position. He has correctly pointed out that the penalty proceedings under Section 271 can be initiated "in the course of any proceedings" under the Act. Similarly, proceedings under Section 273 can be initiated "in the course of any proceedings in connection with regular assessment". It is not necessary that such proceedings should be initiated in the assessment order. Neither the aforesaid two provisions nor Section 144B require the ITO to issue any draft order proposing such actions to the assessee.
15. Similar is the position in respect of levy of interest under Sections 139(8) and 215 of the Act. As per Section 139(8), the assessee is liable to pay interest on the amount of tax payable on the total income as determined on regular assessment as reduced by the advance tax and the tax deducted at source. This is a mandatory provision and comes into play after the tax has been determined on regular assessment. Similarly, interest under Section 215 is leviable in case the advance tax falls short of the assessed tax. The assessed tax has again been defined as tax determined on the basis of regular assessment reduced by the tax deducted at source and the advance tax.
Thus, we are satisfied that the ITO was fully competent to exercise his powers to levy interest under Sections 139(8) and 215 of the Act and also initiate proceedings under Sections 271 and 273 of the Act while completing the assessment even though such actions had not been notified to the assessee in the draft order.
16. It is true that under identical circumstances, the Gujarat High Court in Maharaja Exhibitors' case (supra) has held that in the absence of any direction to levy interest under Sections 139(8) and 215 of the Act or to initiate penalty proceedings under Sections 273(2)(a) and 271(1)(a) of the Act in the draft order, no such directions could be incorporated while passing the final assessment order. A perusal of the said judgment shows that the High Court has proceeded on the assumption that the assessee is entitled to raise objections under Sub-section (2) not only against variation in the quantum of income or loss, but also in respect of the proposed actions for levy of interest and initiation of penalty proceedings. The High Court (at p. 776) has observed as under :
"Thus, it is very clear that, by virtue of this section, in certain circumstances, the legislature wanted the assessee to get an opportunity to represent his case before the final assessment is made."
After arriving at the above conclusions, the Court in respect of levy of penal interest in the final order has (at p. 777) observed as under :
"Looking to the object with which Section 144B has been enacted, it is very clear that the assessee should get an opportunity to represent his case before the Revenue in the event of substantial change being made in his liability. Had the assessee got an opportunity to know the fact that interest was being levied, he could have made a representation to the IAC stating the reasons for which the interest ought not to have been levied. Moreover, had he known about the direction for issuance of a show-cause notice for imposition of penalty, the assessee could have made a representation and could have stated as to why even such a show-cause notice should not be issued. In fact, the assessee was deprived of this opportunity as the said facts were not incorporated in the draft order which was approved by the IAC. There are all chances that the IAC could have taken a different view in the matter of levy of interest or initiation of penalty proceedings after hearing the assessee. Once again, if we look at the object, the object is to reduce litigation and to give an opportunity to the assessee to represent his case before the final assessment is made. The said purpose would not be fructified if the assessee is not informed with regard to the levy of interest or initiation of penalty proceedings in the draft order."
(Emphasis, italicised in print, supplied) Similarly, it has been observed (at p. 779) as under :
"Even with regard to the second question pertaining to issuance of a show-
cause notice, we are of the view that the AO ought to have stated the said fact in the draft order if he had decided to initiate penalty proceedings. It is a settled legal position that in the course of the assessment the AO has to satisfy himself and decide whether penalty proceedings should be initiated. If, during the course of the proceedings he had been satisfied with regard to initiation of the penalty proceedings, he ought to have incorporated the said fact in the draft order so that the assessee and the IAC could have known about the said intention. The assessee could have made a representation before the IAC that there was no case for initiation of penalty proceedings. It is true that the assessee could have replied to the show-cause notice and in such a case the AO could have taken a decision with regard to not initiating penalty proceedings but even in such a case, the object with which Section 144B had been enacted would have been frustrated. As stated hereinabove, the legislature wanted the assessee to get an opportunity to represent his case before passing a final assessment order. The said object has been frustrated here because even after the final assessment order, the litigation would continue and that would put the assessee to harassment and that would also increase the workload of the Department."
(Emphasis, italicised in print, supplied) As already observed by us, the opportunity envisaged under Section 144B of the Act to the assessee to represent his case before a superior officer before the final assessment, is confined to the variations proposed to be made to the returned income/loss exceeding a particular amount. It does not provide for raising any objection against any other action which the AO is legally competent to take while completing the final assessment. Thus, when the assessee is not competent to raise any objection against levy of interest or initiation of penalty proceedings under Sub-section (2) of Section 144B of the Act, there is no question of denial of any opportunity to it to represent its case in this behalf before the IAC. Even the IAC cannot issue any directions on these issues as his power under Sub-section (4) is confined to the objections which can be raised by the assessee under Sub-section (2). Thus, according to us, the reasons given by the Gujarat High Court for granting relief to the assessee are based on an interpretation of Section 144B of the Act, with which we are unable to agree. We, therefore, dissent from the judgment of the Gujarat High Court in Maharaja Exhibitors' case (supra).
Accordingly, the question is answered in the negative, i.e., against the assessee and in favour of the Revenue.
Question No. 3 :
17. This question is an offshoot of question No. 2. The assessee appears to have challenged levy of penal interest under Sections 139(8) and 215 of the Act on merits as well. The Tribunal did not go into this question as it had upheld the assessee's objection to the direction recorded in the assessment order for levy of interest under these two provisions.
18. Counsel for the Revenue contends that the assessee was not competent to file an appeal against levy of interest under Sections 139(8) and 215 of the Act in view of the law laid down by the apex Court in Central Provinces Manganese Ore Co. Ltd. v. CIT (1986) 160 ITR 961 (SC), as the assessee is challenging the levy on merits and not denying its liability to such levy.
19. Be that as it may, it is clear that the assessee had raised objection against levy of penal interest before the Tribunal and the Tribunal has not recorded any findings on this issue. Since, while answering question No. 2, we have reversed the findings of the Tribunal, it is necessary for the Tribunal to dispose of the ground of the assessee challenging levy of interest under Sections 139(8) and 215 of the Act. While doing so, the Tribunal will keep in view the judgment of the Supreme Court in the case of Central Provinces Manganese Ore Co. v. CIT (supra).
With these observations, we answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.
Question No. 1 :
20. The assessee's claim for weighted deduction under Section 35B of the Act on sea freight amounting to Rs. 6,41,758 has been allowed by the Tribunal by following its earlier order in assessee's own case in immediately preceding asst. yr. 1974-75.
21. Mr. Sanjay Bansal, learned counsel for the assessee, has pointed out that the order of the Tribunal for asst. yr. 1974-75 on this issue has since been affirmed by this Court in CIT v. Roadmaster Industries of India (P) Ltd. (1993) 202 ITR 968 (P&H).
22. Weighted deduction under Section 35B of the Act is admissible on the expenditure incurred wholly and exclusively for various purposes mentioned in Clause (b) of Section 35B(1) of the Act. Clause (b) of s, 35B(1) reads as under :
"(b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on--
(i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business;
(ii) obtaining information regarding markets outside India for such goods, services or facilities;
(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit;
(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities;
(v) preparation and submission of tenders for the supply or provision outside India of such goods,--services or facilities, and activities incidental thereto;
(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities;
(vii) travelling outside India for the promotion of the sale outside Indra of such goods, services or facilities, including travelling outward from, and return to, India;
(viii) performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside of such goods, services or facilities; and
(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities; as may be prescribed."
23. A perusal of Sub-clause (iii) shows that any expenditure incurred on carriage of goods to other destination outside India has clearly been excluded from the purview of weighted deduction under Section 35B. Expenditure on sea freight clearly fails under this category. However, in asst. yr. 1974-75, this Court had upheld the assessee's claim under Sub-clause (viii). Sub-clause (viii), prima facie, shows that it entitles an assessee to claim weighted deduction on expenses incurred on performance of service outside India in connection with or incidental to execution of any contract for supply outside India of such goods, services or facilities. This appears to be in respect of residuary expenses which are not dealt with in earlier clauses. When sea freight has been specifically made ineligible for weighted deduction under Sub-clause (iii) above, it cannot be allowed under the general provisions of Sub-clause (viii). According to us, a general provision cannot override a specific provision. We have, therefore, our doubts about the correctness of the view taken by this Court in the case of Roadmaster Industries of India (P) Ltd. (supra). Accordingly, we are of the view that this question deserves to be decided by a larger Bench.
The matter may, now, be placed before Hon'ble the Chief Justice for further orders in this behalf.