Income Tax Appellate Tribunal - Indore
National Newsprint & Paper Mills Ltd. vs Deputy Commissioner Of Income-Tax. ... on 15 July, 1997
ORDER
S.K. Yadav, J.M.
1. These cross-appeals - two by the assessee and two by the Revenue - are preferred against the orders of the CIT(A) for asst. yr. 1989-90. Since common issues are involved, these appeals are being disposed of by this consolidated order.
2. ITA Nos. 650 & 659/Ind/92. - These cross-appeals are enanated from the order dt. 27th September, 1991 passed under s. 154 of the Act. ITA No. 650/Ind/92 is filed by the assessee in which the order of the CIT(A) is assailed on the ground that he has erred in maintaining the disallowance of various accommodation expenses of Rs. 4,31,752 by treating them as guest house expenses. The facts relating to the issue and that the adjustment order s. 143(1)(a) was carried out on 21st January, 1990, in which the guest house expenses of Rs. 4,31,752 were disallowed against which an application under s. 154 was filed by the assessee in which it was contended that the assessee had been disputing these additions in all the past years and since the issue is debatable, no adjustment can be made in this regard under s. 143(1)(a) of the Act. The contentions of the assessee did not find favour with the AO and the application under s. 154 was rejected against which the assessee went in appeal before the CIT(A) but the fortune did not fluctuate.
3. The learned counsel for the assessee submitted that the controversy with regard to this issue is still pending before the Hon'ble High Court of Madhya Pradesh under reference for its adjudication. A copy of the draft statement is placed at pp. 11 to 13 of the compilation. While the assessee has been disputing the disallowance on account of guest house expenses in earlier years and a controversy has not been set at rest so far, the adjustment on this account cannot be made under s. 143(1)(a) of the Act. He also relied on the Circular issued by the CBDT reported in (1994) 209 ITR 75 (St.) and the judgment of the jurisdictional High Court in the case of Ramlal Textiles vs. ITO (1991) 189 ITR 339 (MP). On the other hand, the learned Departmental Representative relied on the order of the CIT(A).
4. We have carefully perused the orders of the authorities below and the documents placed by the parties and the aforesaid judgment. After its careful perusal we find that this controversy with regard to the disallowance of guest house expenses is still pending before the High Court of Madhya Pradesh for adjudication in reference. The contention of the assessee that he had been disputing the disallowance in earlier years is not rebutted by the Revenue. It is a settled position of law that no adjustment can be made under s. 143(1)(a) in the intimation with regard to controversial or debatable issue. Since this issue is debatable, the adjustment on this count is uncalled for under the intimation. We, therefore, set aside the order of the CIT(A) on this count and delete the addition.
5. In the result, ITA No. 650/Ind/92 is allowed.
6. ITA No. 650/Ind/92 has been filed by the Revenue in which it has assailed the order of the CIT(A) in ground No. 1 on the ground that the CIT(A) has erred in directing that no additional tax be levied after readjustment under s. 143(1)(a) in case the net resultant figure is loss.
7. During the course of arguments it was submitted that this issue is squarely covered by the judgment of the Tribunal in the case of Dy. CIT vs. National Textile Corporation in ITA No. 778/Ind/92 dt. 27th December, 1996, and of the Madhya Pradesh High Court in the case of Sanctus Drugs Pharmaceuticals (P) Ltd. & Anr. vs. Union of India & Ors. (1997) 225 ITR 252 (MP).
8. We have heard the submissions of the parties and carefully perused the orders of the authorities below and the aforesaid judgment and after its perusal we are of the view that this issue is squarely covered in favour of the Revenue. Accordingly, we decide this issue in favour of the Revenue.
9. In ground No. 2 the order of the CIT(A) is assailed on the ground that he has erred in directing the AO to allow claim under s. 43B even when no proof for payment was enclosed and also that exgratia payments are not covered under s. 43B of the Act.
10. With regard to this issue our attention was drawn to the Circular No. 659 reported at (1993) 204 ITR 105 (St.) and it was submitted that though the proof of payment was not filed along with the return being not covered by the provisions of s. 43B of the Act, but the same was filed along with the application filed under s. 154 of the Act. Since the proof was filed before the AO during the course of rectification proceedings, it should have been duly examined and allowed by the AO while passing an order under s. 154 of the Act. We do not find any justification for rejecting this claim in the order under s. 154 of the Act. We, therefore, subscribe the order of the CIT(A).
11. In the result, the appeal of the Revenue is partly allowed.
12. ITA Nos. 649 & 650/Ind/92. - These appeals are emanated from the order of the AO dt. 22nd January, 1992, passed under s. 154 of the Act. In ITA No. 649/Ind/92 the assessee has assailed the order of the CIT(A) on the ground that he has erred in maintaining the addition of Rs. 84,06,000 in respect of revision in pay structures of its supervisory and non-supervisory staff by holding that it was not an ascertained liability. The assessee has further submitted that the disallowance of this liability in the order under s. 143(1)(a)/154 is even otherwise wrong. The facts relating to this issue are that the original return was filed declaring a loss of Rs. 489.09 lacs which was processed under s. 143(1)(a) and the intimation was issued on 29th January, 1990. Thereafter, a revised return declaring a loss of Rs. 8,67,90,572 was filed on 16th February, 1990. On the basis of the revised return the AO issued a letter seeking, clarification therein about the provision for Rs. 84.06 lacs made on estimate basis for pending settlement of pay structure of workers and supervisory staff, vide letter dt. 10th May, 1991. Thereafter, the AO issued a notice under ss. 143(2) and 142(1) on 26th July, 1991, for his appearance on 23rd August, 1991 along with the relevant books of accounts and vouchers, etc. consequently, an intimation under s. 143(1)(a) was issued on the revised return in which the AO disallowed the claim to the tune of Rs. 84,06,000 raised on account of provision for pending settlement of pay structure of workers and supervisory staff made on estimate basis against which an application under s. 154 was filed along with the MOU executed between the assessee and the workers before the AO in which the assessee contended that the liabilities were ascertained liabilities and should have been allowed but the contention of the assessee was turned down by the AO and the assessee filed an appeal before the CIT(A) but did not find favour from him. Now, the assessee is before us.
13. The learned counsel for the assessee, Shri M. C. Mehta raised a preliminary objection to the validity of the intimation issued under s. 143(1)(a) on the revised return. It was contended that for framing the assessment two procedures are laid down under the Act. The first procedure is of summary assessment in which an intimation is being issued after making a prima facie adjustment under s. 143(1)(a) of the Act and the other procedure is a regular assessment in which the AO frames regular assessment after making proper verification in the claims of the assessee and after affording an opportunity of being heard to him. It is a consistent view of various High Courts that if a notice under s. 143(2) or 142(1) is issued to the assessee for framing the regular assessment, the AO is precluded from issuing an intimation to the assessee under s. 143(1)(a) of the Act after making a prima facie adjustment. The AO can issue a notice under s. 143(2) or 142(1) of the Act after issuing an intimation for framing a regular assessment if he is not satisfied with the claim of the assessee, allowed under the intimation, or to make a rectification in the intimation under s. 154 of the Act. But in any case the AO is not empowered to issue an intimation once he opted to frame a regular assessment and a notice under s. 143(2) or 142(1) is issued. The learned counsel for the assessee has also relied on the following judgments :
(i) Modern Fibotex India Ltd. vs. Dy. CIT (1995) 212 ITR 496 (Cal);
(ii) Kamal Textiles vs. ITO (1991) 189 ITR 339 (MP); and
(iii) Gujarat Poly-Avx Electronics Ltd. vs. Dy. CIT (1996) 222 ITR 140 (Guj).
14. Mr. Mehta further submitted that once the AO has chosen to seek a clarification by issuing a letter dt. 10th May, 1991, and notices dt. 26th July, 1991, he should not have issued the intimation on 27th September, 1991, in which the claim of the assessee was disallowed. He submitted on merit that the pay scale was to be revised for supervisory staff from 1st January, 1986, and that of non-supervisory staff from 1st October, 1986. The management felt that this pay revision will involve an increased payment of salary/wages by about 5 per cent. over and above the basic pay and DA received by them and due to that it was felt necessary to make the provision of Rs. 84.06 lacs on estimate basis for pending settlement of pay structures of workers and the staff. It was further argued that the union made the charter of demands on 17th March, 1986, and since then the negotiations were going on regarding the increments of supervisory and non-supervisory staff and on the basis of the understanding reached between the management and the workers, the actual calculations were made towards the salary of supervisory staff for the period from January to March, 1986, but for the period of April to September, salary of the supervisory staff was estimated since the figures were not readily available and the total provision of Rs. 84.06 lacs including PF of Rs. 6.46 lacs was made. He further submitted that since the assessee has been maintaining the books of accounts on mercantile basis, the provisions for the ascertained contingent liability should be allowed as it was done as per the accounting system. He invited our attention to the note sheet, details of salary paid and various correspondence pertaining to the increment in the salary.
15. In oppugnation, the learned Departmental Representative has submitted that the liabilities were not ascertained during the accounting period and as such no provision can be made for the unascertained liability. The charter of demand was raised on 10th July, 1989, MOU was executed on 14th August, 1989, which was sent to the government for its approval on 19th August, 1989, and the approval was granted on 20th December, 1989, and after the Government's approval, the formal MOU was signed on 19th January, 1990. The learned Departmental Representative further urged that even the charter of demands was not finalised during the previous year relevant to the assessment year. Hence cannot be said that the liability was ascertained and the provision for the same can be made. Besides, he relied on the observations of the CIT(A).
16. We have heard the rival submissions of the parties and carefully perused the orders of the authorities below and the documents filed by the parties. It is obvious from record that after filing the revised return a letter dt. 10th May, 1991, was issued by the AO in which a clarification with regard to the provisions of Rs. 84.06 lacs made on estimate basis for pending settlement of pay structure of workers and supervisory staff, was sought and the assessee was allowed to file a reply within a week's time. This letter was followed by two notices dt. 26th July, 1991, issued under s. 143(2) and 142(1) of the Act whereby the date of hearing was fixed on 23rd August, 1991, and the assessee was asked to produce all the relevant books of accounts, vouchers, bills, etc. on the date of hearing. After going through these letters and the notices it appears to us that the AO had made up his mind to frame a regular assessment on the basis of revised return, but thereafter the AO issued an intimation after making prima facie adjustment under s. 143(1)(a) of the Act on 27th September, 1991. We find force in the argument of the assessee that once the proceedings for framing the regular assessment have been initiated by issuing a notice under s. 143(2) or 142(1) the AO is precluded from making prima facie adjustment under s. 143(1)(a). The Calcutta High Court has specifically held in the case of Modern Fibotex India Ltd. vs. Dy. CIT (supra) that once the notice under s. 143(2) has been issued, there is no scope for the authorities either to make prima facie adjustment on the basis of the return, as filed, or issue an intimation under s. 143(1)(a) of the Act. A similar view was taken by the Gujarat High Court in the case of Gujarat Poly-avx Electronics Ltd. (supra) in which their Lordships have held that the AO cannot make adjustment or pass order under s. 143(1) after issuance of notice under s. 143(2) of the Act, after making the following observations :
"Reading the language of sub-cl. (i) of cl. (a) of sub-s. (1) of s. 143 of the IT Act, 1961, it is clear that the AO is permitted to make adjustments and the same is without prejudice to the provisions of sub-s. (2). The right of the AO to proceed under s. 143(2) is preserved despite intimation to the assessee under s. 143(1) of the Act. The use of the word 'shall' in sub-s. (2) of s. 143 of the Act mandates the AO to issue notice to the assessee with a view 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. After expiry of 12 months from the end of the month in which the return is furnished no notice can be served on the assessee. But intimation under s. 143(1) can be sent before the expiry of two years from the end of the assessment year. Thus, the legislature has not permitted simultaneous proceedings. The CBDT in its Circular No. 549 dt. 31st October, 1989, has advised the AO to issue intimation under s. 143(1) before issuance of notice under s. 143(2) of the Act. Hence, after issuance of notice under s. 143(2) of the Act, it is not open for the AO to make adjustment or to pass order under s. 143(1) of the Act but he has to make assessment in accordance with law, i.e. under s. 143(3) of the Act."
A similar view was also adopted by the Madhya Pradesh High Court in the case of Kamal Textiles & Ors. (supra). Besides these judgments we have been taking consistent view that there are two proceedings for framing the assessment, one is summary assessment in which intimation under s. 143(1)(a) is being issued and the other is regular assessment framed under s. 143(3) after giving an opportunity of being heard to the assessee. The intimation under s. 143(1)(a) of the Act cannot be issued after issuance of a notice under s. 143(2) of the Act or 142(1) of the Act though a regular assessment can be framed after making prima facie adjustment under s. 143(1)(a) of the Act by issuing a notice under s. 143(2) or 142(1) of the Act. But in the instant case the intimation was issued after the issuance of notice under s. 143(2) and 142(1) which not is permissible under the law. As such, the intimation and the subsequent proceedings emanated from the said intimation are void ab initio and, accordingly, we quash the intimation under s. 143(1)(a) of the Act and subsequent proceedings emanating from it.
17. We have also perused the record with regard to the claim of the assessee on merit and we find that the accounting period of the assessee ended on 31st March, 1989, for the relevant assessment year and the charter of demands was revised on 10th July, 1989 though it was made on 17th March, 1986. The MOU was executed on 14th August, 1989, and was sent for government's approval on 19th August, 1989, which was later on approved by the government vide letter dt. 20th December, 1989 and finally this MOU was signed on 19th January, 1990. It is also obvious from the audit report which is placed at p. 38 that the accounts were audited on 31st July, 1989, in which provision of Rs. 84.06 has been made on estimate basis. We have carefully perused the judgments quoted by the parties and the accounting year standard 4 issued by the Council of the Institute of Chartered Accountants carefully and are of the view that whenever the accounts are maintained on mercantile basis, the assessee can make a provision of contingent liabilities if it is ascertained. If the liabilities are not ascertained, the provision for contingent liability cannot be made. In the instant case, during the accounting period even the charter of demands was not finalised. It was revised even after the accounting period in the month of July, 1989, though prior to the audit of the account. The MOU was executed on 14th August, 1989, even after the completion of the audit of the accounts. All these facts are sufficient to establish that the liabilities were not ascertained during the accounting period or even prior to the date of audit of account. In these circumstances, the contention of the assessee cannot be accepted that the contingent liabilities were ascertained during the period of account and the assessee has rightly made the provision for the same. Even the note sheet in which the provision for anticipatory increase in the salary and wages of supervisory and non-supervisory staff was calculated, was prepared by the staff on 9th June, 1989, after the accounting period. There is no iota of evidence on record wherefrom it can be evinced that the liabilities were ascertained during the accounting period. As such, we are of the view that the CIT(A) who has discussed the issue in detail in his order was justified in rejecting the claim of the assessee on merit.
18. Since we have already quashed the intimation issued by the AO and the subsequent proceedings emanated from it, the findings on merit will not create any liability against the assessee. Accordingly, the addition of Rs. 84.06 lacs maintained by the CIT(A) stands deleted.
19. In the result, the assessee's appeal is allowed.
20. ITA No. 660/Ind/92. - This is an appeal by the Revenue in which the order of the CIT(A) is assailed on the ground that he has erred in directing that no additional tax be levied if after adjustment under s. 143(1)(a) the net income is resultant into loss.
21. Since this issue has already been adjudicated upon and decided in ITA No. 659/Ind/92 in favour of the Revenue, we decide this issue in Revenue's favour, after relying upon the observations made above.
22. In ground No. 2 the Revenue has assailed the order of the CIT(A) that he has erred in deleting the amount of depreciation of Rs. 14,28,758 added by the assessee itself. With regard to this issue it is submitted that in the revised return depreciation debited in the books was added back and allowed as per law by the AO. The Revenue was not left with any grievance to this disallowance. As such, this ground has become infructuous and, accordingly the same is dismissed.
23. In the result, the appeal is partly allowed.