Income Tax Appellate Tribunal - Ahmedabad
Kiran Corporation vs The Asstt. C.I.T. on 24 November, 2005
Equivalent citations: (2006)102TTJ(AHD)375
ORDER
Vimal Gandhi, President
1. On account of difference between the Hon'ble Members of Ahmedabad. Bench., the following questions have been referred to me for an appropriate action Under Section 255(4) of the Income-tax Act:
1. Whether, in the facts and circumstances of the case, the Accountant Member is justified in deleting the additional tax levied Under Section 143(1 A) relying. upon the ' Supreme Court decision in the case of CIT v. HEG 243 ITR 48 or whether the Judicial Member is justified in upholding the levy of additional tax relying upon the decision of Supreme Court in the case of Addl. CIT v. J.K. Synthetics 251 ITR 200 and decision of the Tribunal in the case of Mamta Machinery P. Ltd. v. DCIT (ITA No. 326/A/95); and
2. Whether the Judicial Member is justified in taking the view that deletion of Addl. Tax Under Section 143(1 A) would be in direct conflict with the earlier decision of the Tribunal in Mamta Machinery P. Ltd. v. DCIT wherein the Tribunal had upheld the adjustment Under Section 143(la).
2. The facts, of the case are that assessee filed return declaring total income of Rs. 3,52,306. While making prima facie adjustments Under Section 143(1)(a) of Income-tax Act, a sum of Rs. 1,30,815 debited to the profit and loss account on account of bad debt was added back. The Assessing Officer also charged additional tax Under Section 143(1A) of Income-tax Act on account of adjustments made.
3. The assessee thereafter filed application Under Section 154 of the Income-tax Act and contended that Explanation to Section 36(1)(vii) applied in this case was introduced, by the Finance Act, 2001 with retrospective effect from 1.4.1989. The aforesaid Explanation, was not applicable when the return for the relevant assessment year was filed. The claim of deduction was bonafidely made and there was no question of levy of additional tax on account of prima facie adjustment made in this case. The assessee relied upon certain decisions.
4. The Assessing Officer did not accept claim of the assessee. On further appeal the learned CIT (Appeals) also upheld the view taken by the Assessing Officer.
5. The assessee thereafter approached the Income-tax Appellate Tribunal. The matter was heard by the Appellate Tribunal but there was a difference between the Members on the relief to be allowed. Learned Accountant Member was of the view that additional tax was of penal nature and, therefore, same could not be levied on the facts of the case. The matter in his view was squarely covered by the decision of Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd. 243 ITR 48. He accordingly held that no additional tax could be charged from the assessee. The same was deleted in the proposed order of the learned Accountant Member....
6. The learned Judicial Member did not agree with the above view. He found that Supreme Court in the case of Asst. CIT v. J.K. Synthetics Ltd. 251 ITR 200 had reservation as to the correctness of decision in the case of Hindustan Electro Graphites Ltd. (supra). The decision in the case of J.K. Synthetics (supra) was given by a bench of three Judges whereas other case of Hindustan Electro Graphites Ltd. was rendered by two Hon'ble Judges of Supreme Court. The learned Judicial Member accordingly held that perception of Apex Court in the two decisions differed relating to "character of additional tax". In the case of J.K. Synthetics (supra), the additional tax was not treated as penalty, the view which was taken by their Lordships in the earlier decision. The learned Judicial Member in the proposed order also relied upon decision of Income-tax Appellate Tribunal 'C' Bench, Ahmedabad in the case of Mamta Machinery P. Ltd. v. DCIT SR-II, A'bad dated 30.8.2002 in IT A No. 326/A/95 in appeal pertaining to assessment year 1991-92. According to the Judicial Member, on identical facts, the action of revenue authorities imposing additional income-tax was upheld. In the aforesaid case the Bench also took note of two decisions of the Apex Court and also of reservations.relating to correctness of first decision expressed by larger Bench of three Judges. The matter in that case was held to be fully covered by Full Bench decision of Supreme Court in the case of J.K. Synthetics (supra).
The learned Judicial Member further observed as under.
5. It is pertinent to note that in the case of Mamta Machinery P. Ltd. (supra) the prima facie adjustments were made by the A.O. by disallowing an amount of Rs. 8,91,310 in respect of provision for doubtful debt while processing the return of income Under Section 143(1)(a) for the A.Y. 1991-92. In that case also the bad debts were not written off in accordance with the explanation below Section 36(1)(vii) and the claim of deduction was not allowed by A.O. keeping in view the Explanation below Section 36(1)(vii) inserted by the Finance Act 2001 with effect from 1.4.1989 which provides that any provision for bad and doubtful debt would not qualify as permissible deduction Under Section 37(1)(vii) of the IT. Act.
6. The Hon'ble Gujarat High Court in the case of Sayaji Iron and Engg. Co. v. CIT reported in 253 ITR 749 (Guj) has held that decision of earlier co-ordinate Bench is binding on subsequent Bench and in case of dis-agreement matter be referred to Hon'ble President of Tribunal so that he could have the case referred to a Bench consisting of three or more Members for which there is provision in the I.T. Act itself. I am therefore of the view that the Tribunal has no option either to follow the decision of ITAT, C-Bench, Ahmedabad in the case of Mamta Machinery Pvt. Ltd. (supra) or refer the same to larger Bench in accordance with provisions contained in Section 255(4) of the IT, Act, 1961.
7. In view of the foregoing, I am of the view that prima facie adjustment in intimation Under Section 143(1)(a) was correctly made by A.O. The levy of additional tax Under Section 143(1 A) is also in accordance with the judgment of Apex Court in the case of J.K. Synthetics Ltd. (supra) as well as decision of this Tribunal in the case of Mamta Machinery Pvt. Ltd. (supra). I accordingly hold that ld. CIT (A) is fully justified in upholding the levy of additional tax Under Section 143(1A) of the I.T. Act, 1961.
7. In the above background, the matter has been referred to me Under Section 255(4) of the Income-tax Act. The Third Member case was fixed for hearing and I have heard both the parties. The learned counsel for the assessee pointed out that deduction of bad debt was claimed on the basis of decisions of jurisdictional High Court in the case of Sarangpur Cotton Manufacturing Co. Ltd. v. CIT 143 ITR 166, and Vithaldas H. Dhanjibhai, Bardanwala v. CIT 130 ITR 95, as per the law prevalent on the date of filing of return i.e. on 20.12.1990. The amendment was subsequently introduced with retrospective effect in Section 36(1)(vii) of Income-tax Act. He did not dispute adjustment of bad debts to challenge levy of additional tax. He argued that inspite of doubt expressed by the larger Bench of Supreme Court in the case of J.K. Synthetics (supra) on the decision of two Judges Bench in the case of Hindustan Electro Graphites Ltd. (supra), the two Judges Bench decision still hold the field and on identical facts had to be followed. Levy of additional tax was penal. The facts in the case of J.K. Synthetics (supra) were quite distinguishable and so was the position in the case of Mamta Machinery P. Ltd. (supra). No such issue arose in those cases.
8. The learned counsel further relied upon decision of Gauhati High. Court in the case of DCIT v. Ashok Paper Mills Ltd. 256 ITR 673 where it was again emphasized that additional tax was not leviable if the return was submitted as per law prevalent at the time of submission of the return and adjustments were made on account of retrospective operation of statutory provision. The learned counsel for the assessee accordingly supported the order of the Accountant Member.
9. The learned Departmental Representative supported the proposed order of learned Judicial Member. He argued that adjustment made was perfectly justified in. view of amendment of Section 36(1)(vii) of Income-tax Act. Once adjustments were made the adjusted income was to be considered for purposes of charging of additional tax which in his view was automatic and mandatory. It is in addition to the tax payable by the assessee. According to learned Departmental Representative, charging section was required to be strictly applied. In this connection, he relied upon decision of Supreme Court in the case of Controller of Estate Duty v. Kantilal Trikamlal 105 ITR 92. He also relied on decision of Motilal Ambaidas v. CIT 108 ITR 136 and Union of India v. Azadi Bachao Andolan and Anr. 206 ITR 706.
The additional tax being automatic once adjustment is made there was no discretion, not to levy additional tax. Intention of the assessee in such a case was immaterial. Apart from the decision of Supreme Court in the case of J.K. Synthetics (supra), the learned Departmental Representative relied upon decision of Hon'ble Kerala High Court in the case of CIT v. M.D. Thomas 267 ITR 761 to support the proposed order of learned Judicial Member.
10. I have given careful thought to the rival submissions of the parties. The Provisions of Section 143(1)(a) as amended by the Finance Act, 1987 w.e.f. 1.4.1988 reads thus :
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 pre-judice 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 the 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 claimed in the return, which, on the basis of the 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.
11 The provisions of Sub-section (1A), as it existed originally i.e., w.e.f 1.4.1988 when from it was levied, read thus:
(1A)(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 (i) of clause (a) of sub-section (1);
(ii) where any refund is due under sub-section (1), reduce the amount of such refund by an amount equivalent to the additional income-tax calculated under sub-clause (i).
12. The reasons behind amendment of provisions of Section 143(1) w.e.f. 1.4.88 by the Finance Act, 1987 have been explained in Circular No. 549 dated 31.10.1989 of the CBDT as follows:
5.2 Requirement of passing an assessment order in all cases dispensed with (sub-section (1) of Section 143). - Under the old provisions of sub-section (1) of Section 143, after a return of income had been filed, a regular assessment order had to be passed by the Assessing Officers even where the return was accepted without requiring the presence of the assessee or the production by him of any evidence in support of the return. However, sub-section (1) of the new section, substituted by the Amending Act, 1987, has done away with this requirement and it only provides for proper recovery of tax or interest due from the assessee or issue of refund due to the assessee on the basis of the return. Clause (a) of subsection (1) of the new section provides that after a return has been filed under Section 139 or in response to notice under Section 142(1), the following action shall be taken :-
(i) if any tax or interest is found due on the basis of the return, after adjustment of the pre-paid taxes, an intimation shall be sent to the assessee specifying the amount so payable and such intimation shall be deemed to be the notice of demand; and
(ii) if any refund is due, it shall be granted to the assessee.
Thus, if the tax on the basis of the returned income and interest, if any, due under various provisions of the Act (as explained in para 4.16 of these Explanatory Notes) has been correctly paid so that no sum is found payable by or refundable to the assessee, no further action on the return is necessary, unless, of course, the case is picked up for scrutiny.
5.3 Adjustments 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 the purposes of computing the 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 only on the basis of information available in the return or the accompanying accounts or documents and not on the basis of the past records of the assessee. Some examples of such prima facie admissibles or inadmissibles in respect of which adjustments can be made to the returned income or loss are :-
(examples (i) to (xii) are not reproduced) 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.
5.7 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)(a). - The new Section 143, as substituted by the Amending Act, 1987, while dispensing with the necessity of passing assessment orders 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.
13. Sub-section (1A) was amended by the Finance Act, 1993, with retrospective effect from April 1, 1989, which was the date upon which sub-section (1A) had been introduced into the Act. The substituted sub-section (1A) read thus :
(1A)(a) Where as a result of the adjustments made under the first proviso to clause (a) of sub-section (1), -
(i) the income declared by any person in the return is increased; or
(ii) the loss declared by such person in the return is reduced or is converted into income, the Assessing Officer shall, -
(A) in a case where the increase in income under sub-clause (i) of this clause has increased the total income of such person further increase the amount of tax payable under sub-section (1) by an additional income-tax calculated at the rate of twenty per cent, on the difference between the tax on the total income so increased and the tax that would have been chargeable had such total income been reduced by the amount of adjustments and specify the additional income-tax in the intimation to be sent under sub-clause (i) of clause (a) of sub-section (1);
(B) in a case where the loss so declared is reduced under sub-clause (ii) of this clause or the aforesaid adjustments have the effect of converting that loss into income, calculate a sum (hereinafter referred to as additional income-tax) equal to twenty per cent, of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person and specify the additional income-tax so calculated in the intimation to be sent under sub-clause (i) of clause (a) of sub-section (1);
(C) where any refund is due under sub-section (1), reduce the amount of such refund by an amount equivalent to the additional income-tax calculated under sub-clause (A) or sub-clause (B), as the case may be.
14. In Circular No. 657 dated 30.8.1993, the aforesaid amendment has been explained thus:
Modification of the provisions relating to levy of additional income- tax
40. The provisions of Section 143(1A) of the Income-tax Act provided for levy of twenty per cent, additional income-tax where the total income, as a result of the adjustment made under the first proviso to Section 143(1) (a), exceeded the total income declared in the return. These provisions sought to cover cases of returned income as well as returned loss. Besides its deterrent effect, the purpose of the levy of the additional income-tax was to persuade all the assessees to file their returns of income carefully to avoid mistakes.
40.1 In two recent judicial pronouncements, it had been held that the provisions of Section 143(1A) of the Income-tax Act, as these were worded, were not applicable in loss cases.
40.2 The Act, therefore, amends Section 143(1A) of the Income-tax Act to provide that where as a result of the adjustments made under the first proviso-to Section 143(1) (a), the income declared by any person in the return is increased the Assessing Officer shall charge additional income-tax at the rate of twenty percent. on the difference between the tax on the increased total income and the tax. that would have been chargeable had such total income been reduced by the amount of adjustments. In cases where the loss declared in the return has been reduced as a result of the aforesaid adjustments or the aforesaid adjustments have the effect of converting that loss into income, the Act provides that the Assessing Officer shall calculate a sum (referred to as additional income-tax) equal to twenty per cent of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person.
40.3 This amendment takes effect from 1st April, 1989 and accordingly, applies in relation to the assessment year 1989-90 and subsequent years.
15. The validity of levy of additional tax in the context of the provisions as it existed prior to its retrospective amendment by Finance Act, 1993 w.e.f 1.4.89, had come for consideration before the Hon'ble Supreme Court. The facts of the case before the Hon'ble Supreme Court in the case of Hindustan Electrographites Ltd. 243 1TR 48 (SC) and the decision of the Court is as follows: The assessee, filed its return of income for the asst. yr. 1989-90. The return was filed on 29th December, 1989. Under Section 28 of the Act, income mentioned therein is chargeable to income-tax under the head "profit and gains of business or profession". Clause (iii)(b) in Section 28 was inserted by the finance Act of 1990. Finance Bill which ultimately became the Finance Act received assent of the President of India on 31st May, 1990. Clause (iii)(b) was given retrospective operation w.e.f. 1st April, 1967. By virtue of the amended provisions of law with retrospective effect, cash assistance received by the Assessee was taxable. Before the insertion of cl. (iii)(b), cash assistance received by any person against exports under any scheme of the Government could not be chargeable to income-tax under the head "profits and gains of business or profession". The assessee had received in the previous year relevant to the asst. yr. 1988-89 a sum of Rs. 1,31,41,030 by way of cash assistance. Since cl. (iii)(b) was inserted in Section 28, though having retrospective operation by the Finance Act, 1990, the assessee did not include this income in its return which, as noted above, was filed on 29th December, 1989. The AO made prima facie adjustment Under Section 143(1)(a) of the Act, by bringing to tax cash assistance received by the Assessee against exports, in view of the retrospectively amended law. The AO also levied additional tax on the adjustment so made. The tribunal held that levy of additional tax was unjustified. The stand of the Revenue was that under Section 143(1A), the AO has no choice and he has to levy additional tax once he finds that the assessee has not shown the amount of the cash compensatory support in his return, whatever the reason be. The Honourable Supreme Court held as follows:
7. Decision of the Calcutta High Court in Modern Fibotex India Ltd & Anr. (supra) squarely covers the issue involved in the present appeal. Then we have to see the law on the date of filing of the return. To attract penal provisions there has been same element of lack of bona fides unless the law specifically provides otherwise.
The case before us does not represent even a bonafide mistake. In fact it is not a case where under some mistaken belief the assessee did not disclose the cash compensatory support received by it -which he could offer to tax. It is true that income by way of cash compensatory support became taxable retrospectively w.e.f. 1st April, 1967, but that was by amendment of Section 28 by the Finance Act of 1990 which amendment could not have been known before the Finance Act came into force. Levy of additional tax bears all the characteristics of penalty. Additional tax was levied as the assessee did not in his return show the income by way of cash compensatory support. The AO on that account levied additional income-tax. No additional tax would have been leviable on the cash compensatory support if the Finance Act, 1990, had not so provided even though resrospectively. Assessee could not have suffered additional tax but for the Finance Act, 1990. After he had filed his return of income, which was correct as per law on the date of filing of the return, it was thereafter that the cash compensatory support also came within the sway of Section 28. When additional tax has imprint of penalty Revenue cannot be heard saying that levy of additional tax is automatic under Section 143(1A) of the Act. If additional tax could be levied in such circumstances it will be punishing the assessee for no fault of his. That cannot ever be the legislative intent. It shocks the very conscious if in the circumstances Section 143(1A) could be invoked to levy the additional tax. Following observations by the Constitution Bench of this Court in Pannalal Binjraj and Anr. v. Union of India and Ors. (1957) 31 ITR 565 (SC) : TC 69 R. 243 are apt:
A humane and considerate administration of the relevant provisions of the IT Act would go a long way in allaying the apprehensions of the assessees and if that is done in the true spirit, no assessee will be in a position to charge the Revenue with administering the provisions of the Act with 'an evil eye and unequal hand'.
8. We uphold the view expressed by the Calcutta High Court. Keeping in view the principles laid by this Court it has to be held that in the circumstances of the present case levy of additional tax taking into account the income by way of cash compensatory support is not warranted. The question is answered in affirmative, i.e., in favour of the assessee and against the Revenue. The appeal is accordingly dismissed with costs.
16. In the case of Assistant Commissioner Of Income-tax v. J.K. Synthetics Ltd. 251 ITR 200 (SC), the question before the Court was as to whether additional tax could be levied in a case where consequent to the prima facie adjustment made by the AO, the loss declared in the return alone stood reduced. The Court after making a reference to the amended provisions of Section 143(1A) by the Finance Act, 1993 w.e.f. 1.4.89 held as follows:
The substituted sub-section (1A), therefore, made it clear that even where the loss declared by an assessee had been reduced by reason of adjustments made under sub-section (1)(a), the provisions of sub-section (1A) -would apply. This being a retrospective amendment, it covers the controversy in this appeal and, therefore, the appeal-would have to be decided in favour of the Revenue.
Learned counsel for the assessee, however, relied upon the judgment of a Bench of two learned judges of this court in CIT v. Hindustan Electro Graphites Ltd. [2000] 243 ITR 48. This was a case in which the return that the assessee had filed was correct by reason of the law as it stood when the return was filed. A retrospective amendment of Section 28 of the Act rendered that return incorrect. An adjustment in the return was made under sub-section (1) of Section 143 and, therefore, the provisions of sub-section (1A) were sought to be invoked. This was challenged and the High Court upheld the challenge, as did this court. It took the view that the additional penalty under sub-section (1A) bore the imprint of a penalty and no penalty could be levied because the return filed by the assessee was correct when it was filed.
This judgment has no application to the facts of the present case for the reason that it is nobody's case that a retrospective amendment has rendered a correct return filed by the assessee incorrect. The question here is only whether a loss which is reduced by reason of the application of the provisions of sub-section (1) (a) falls within the ambit of sub-section (1A).
We should add that we have reservations about the correctness of the judgment in Hindustan Electro Graphite Ltd. 's case [2000] 243 ITR 48 (SC) principally because the assessee in that case had not challenged the provisions of sub-section (1A). The appeal is allowed. The order under appeal is set aside.
There shall be no order as to costs.
17. Both the aforesaid decisions of the Hon'ble Supreme Court came up for consideration before the Honourable Kerala High Court in the case of Commissioner of Income-tax v. M.D. Thomas 267 ITR 761 (KER) The question for consideration therein was as to Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding, that additional tax under Section, 143(1A) was not leviable on the assessee ?
The facts were that the Assessee filed return for the assessment year 1991-92 claiming, total loss of Rs. 6,04,043. In arriving at the loss assessee had claimed deduction under Sections 80HH and 80J to the extent of Rs. 2,63,130. Assessing Officer processed the return under Section 143(1)(a) of the Income-tax Act and determined the loss at. Rs. 3,40,930. Assessee's claim for relief under Sections 80HH and 80U was-disallowed on the view that the result of the business being loss, deduction was not permissible. In the intimation issued, under Section 143(1)(a) on the reduced loss of Rs. 3,40,930. Assessee's claim for relief under Sections 80HH and 80J was disallowed on the view that the result of the business being loss, deduction was not permissible. In the intimation under Section 143(1)(a) on the reduced loss of Rs. 3,40,930, additional tax of Rs. 24,450 was levied under Section 143(1A). The Court held as follows:
We notice that the position has been resolved by the Apex Court in Asst. CIT v. J.K. Synthetics Ltd. [2001] 251 ITR 200 : 116 Taxman 598...Apex Court reversed the decision of the Delhi High Court in J.K. Synthetics Ltd. v. Asstt. CIT [1993] 200 ITR 584 and held that the retrospectively substituted sub-section (1A) made it clear that even where the loss declared by the assessee had been reduced by reason of adjustments made under sub-section (1)(a) the provisions of subsection (1A) applied and the additional tax could be imposed.
Counsel appearing for the assessee however took up the stand, placing reliance of the decision of the Apex Court in CIT v. Hindustan Electro Graphites Ltd. [2000] 243 ITR 48 : 109 Taxman 342, that since there is no dishonest intention assessee cannot be held liable. The Legislature has not used the expression "dishonest intention". Over and above, the decision in Hindustan Electro Graphites Ltd. 's case (supra), has been distinguished and doubted-by the Apex Court in J.K. Synthetics Ltd. 's case (supra). In such circumstances, we answer the question in favour of the revenue and against the assessee.
18. The aforesaid two decisions of Hon'ble Supreme Court were also considered by Hon'ble Delhi High Court in the case of Samtel Color Ltd v. Union of India and Ors. 258 ITR 1. In that case, the Court held that question of prima facie adjustment Under Section 143(1)(a) has to be considered with reference to position on the date on which the return is filed and not with reference to events subsequent thereto. Their Lordship, therefore followed decision of Supreme Court in the case of CIT v. Hindustan Electrographites Ltd. 243 ITR 48. In respect of decision in the case of J.K. Synthetics Ltd. (supra), their Lordship held that the Court has expressed reservation about the judgment in Hindustan Electrographites Ltd. case (supra) only to the extent it pertains to the interpretation of sub-section (1A) of Section 143.
It is evident from the above case that Hon'ble Delhi High Court did not take that subsequent decision in the case of J.K. Synthetics Ltd. had over ruled earlier decision of the Apex Court in the case of Hindustan Electrographites Ltd (supra).
19. In the case of DCIT v. Ashok Paper Mills Ltd. 256 ITR 673, their Lordships of Guwahati High Court considered both the decisions of Hon'ble Supreme Court with reference to application of Section 143(1A) of Income-tax Act. They first noted above quoted observations of constitutional Bench of Apex Court in the case of Pannalal Binjraj v. Union of India 31 ITR 565 and further observed as under:
10. It would appear from the aforesaid judgment that the levy of additional income-tax in the circumstances of the aforesaid case carries with it the imprint of penalty and the levy of the additional tax is not automatic under Section 143(1A). The ratio available in this judgment, in the given circumstances of the case at hand, lead to the same conclusion. This judgment of the Supreme Court has been taken into consideration in the judgment in Asstt. CIT v. J.K. Synthetics Ltd. AIR 2001 SC 1531, delivered by a larger Bench. The Supreme Court in this judgment held as follows:
The substituted Sub-section (1A), therefore, made it clear that even where the loss declared by an assessee had been reduced by reason of adjustments made under Sub-section (1)(a), the provisions of Sub-section (1A) would apply. This being a retrospective amendment, it covers the controversy in this appeal and, therefore, the appeal would have to be decided in favour of the Revenue. Learned counsel for the assessee, however, relied upon the judgment of a Bench of two learned Judges of this Court in CIT v. Hindustan Electro Graphites Ltd (2000) 3 SCC 595. This was a case in which the return that the assessee had filed was correct by reason of the law as it stood when the return was filed, A retrospective amendment of Section 28 of the Act rendered that return incorrect. An adjustment in the return was made under Sub-section (1) of Section 143 and, therefore, the provisions of Sub-section (1A) were sought to be invoked. This was challenged and the High Court upheld the challenge, as did this Court. It took the view that the additional penalty under Sub-section (LA) bore the imprint of a penalty and no penalty could be levied because the return filed by the assessee was correct when it was filed.
This judgment has no application to the facts of the present case for the reason that it is nobody's case that a retrospective amendment has rendered a correct return filed by the assessee incorrect The question here is only whether a loss which is reduced by reason of the application of the provisions of Sub-section (1) (a) falls within the ambit of Sub-section (1A).
We should add that we have reservations about the correctness of the judgment in Hindustan Electro Graphites Ltd. 's case (supra) principally because the assessee in that case had not challenged the provisions of Sub-section (1A).
11. Mr. K.P. Sharma, learned counsel for the Revenue, with reference to the observation in paras 4 and 7 submitted that the Supreme Court has not deprecated the retrospectivity of the amendment made in 1993. The observation in the aforesaid judgment, in our opinion, will have to be read as a whole. What is stated in para 4 is that the controversy of that case was squarely covered because the provisions of the Act were given retrospective effect. This does not mean that the Supreme Court extended support to the retrospective amendment imposing penalty. In the concerned writ petitions the assessee has challenged the provisions, of Sub-section (1A). Although the learned single Judge upheld the legislative competence of such a legislation he had not approved of the retrospective operation because of the penal nature ingrained in the process of imposition of additional income-tax. We have no reason to disagree with the reasoned decision of the learned single judge. The act or omission for which no additional income-tax was payable as per law in force at a given time cannot be subjected to additional taxation with retrospective effect. We are unable to persuade ourselves to propound a view other than the above known concept specially when the imprint of penalty is ex facie visible in the amended provision.
20. I, see that there is divergence of views between different High Courts on the question of levy of additional tax Under Section 143(1 A) where adjustments are made Under Section 143(1)(a). Even the decision of Apex Court in the case of J.K. Synthetics Ltd (supra) has been read differently by different High Courts. In the light of above decisions, it is to be held that the decisions in the case of Hindustan Electro Graphites Ltd. (supra) has not been overruled in the later decision in the case of J.K. Synthetics Ltd. (supra) by the Apex court.
The Hon'ble Delhi High Court has specifically applied the decision. The provision of Section 143(1 A) is to deter an assessee is admitted even by the revenue authorities in their Circulars quoted above. There is some agreement that a return which was correct on -the date it was filed on the basis of documents and material accompanying the return and prima facie adjustments are made on the basis of retrospective amendment of a statutory provision which assessee could not foresee, the provision of Section 143(1 A) would not be attracted. At least above view can be held to be a possible view as High Courts, have applied it. The issue before me being covered by above proposition, I deem it unnecessary to consider the question whether additional tax can be imposed where deductions are bonafidely claimed and prima facie adjustments cover mistakes which are unintentional. It may be reasonable to hold that in such cases additional tax can be imposed but as that issue is not before me, I refrain from expressing any, final view on this aspect of the matter.
21. Now proceeding to the facts in the present case, it is admitted position that prima facie adjustments Under Section 143(1)(a) were made in this case only because of retrospective amendment of Section 36(1)(vii) of the Income-tax Act. But for retrospective amendment, the claim of the assessee was fully supported by two decisions of Hon'ble Gujarat High Court cited by the learned counsel for the assessee. Therefore, on the basis of return and accompanying documents it could not be said that return filed by the assessee was such a return which required prima facie adjustments. Adjustments have been made on account of retrospective amendment, and therefore, in my view it is not fit case for levy... of additional tax. For the aforesaid reasons, I agree with the view taken by the learned Accountant Member and hold that the decision in the case of Hindustan Electro Graphites Ltd. was rightly applied.
22. The learned Judicial Member also referred to the case of Mamta Machinery Pvt. Ltd. decided by the same learned Accountant Member. The said case related to assessment year 1991-92 whereas Explanation with retrospective effect was added through Finance Act, 1990. Thus the amended provision was introduced much before the date of filing of return and assessee could not claim benefit of decision of Hon'ble Supreme Court in the case of Hindustan Electro Graphite Ltd (supra). The decision in the case of Mamta Machinery P. Ltd. is, therefore, distinguishable on facts and has.. no application here.
For the aforesaid reason, I agree with the view of learned Accountant Member.
23. Let this case be placed before the regular Bench for deciding the appeal in accordance with law.
As there is difference of opinion between the Members of the Division Bench, we refer the following points of difference to the President, ITAT for appropriate action as per the provisions of Section 255(4) of the IT. Act :-
(I) Whether in the facts and circumstances of the case, the Accountant Member is justified in deleting the additional tax levied Under Section 143(1A) relying upon the Supreme Court decision in the case of CIT v. HEG 243 ITR 48 OR whether the Judicial Member is justified in upholding the levy of additional tax relying upon the decision of Supreme Court in the case of Addl. CIT v. J.K. Synthetics 251 ITR 200 and decision of the Tribunal in the case of Mamta Machinery P. Ltd. v. DCIT (ITA No. 326/A/95); and (II) Whether the Judicial Member is justified in taking the view that deletion add tax Under Section 143(1A) would be in direct conflict with the earlier decision of the Tribunal in Mamta Machinery P. Ltd. v. DOT wherein the Tribunal had upheld the adjustment Under Section 143(1a).
I have perused the order proposed by learned Accountant Member in IT A No. 697 & 69S/A/1995 for the asstt. year 1990-91. However, I could not persuade myself to agree with view taken in ITA No. 698/A/95. Therefore., I am recording my findings separately:
2. In ITA No. 698/A/95, the ld. Accountant Member upheld the action of A.O. regarding prima facie adjustment made in respect of provision for bad and doubtful debt, but following the judgment of Apex Court in the case of CIT v. Hindustan Eelectro Graphic Ltd. reported in. 243 ITR 48 (SC)...deleted the additional tax levied by Assessing Officer Under Section 143(1A) of the I.T. Act, 1961.
3. It is pertinent to note that Judgment of Apex Court in the case of Hindustan Electro Graphic Ltd. (supra) rendered by two Judges was cited before the Supreme Court on behalf of tax payer in the case of Addl. CIT v. J.K. Synthetics 251 ITR 200 (SC). The Full Bench decision of Hon'ble Supreme Court in the case of Addl. CIT v. JK Synthetics Ltd. reported in 251 ITR 200(SC) consisted of three Judges, had reservation as to the correctness of decision rendered by the Bench of two Judges in Hindustan Electro Graphite Ltd. case(supra) which has been relied by ld. Accountant Member in his proposed order. This is because, the assessee, in that case had not challenged the provision of sub-section (1A) of Section 143, i.e. the retrospective ' amendment itself This clearly indicates the perception of the Apex Court in the two decisions differed more on appreciation of the character of additional tax. It is not treated as a penalty in the later case, while in the earlier decision the Apex Court understood the Additional tax as imprint of penalty, a view which was apparently not shared in the later decision.
4. The IT AT, C Bench Ahmedabad in the case of Mamta Machinery P. Ltd. v. DCIT SR-II, A'bad vide order dated 30-8-2002 in ITA No. 326/A/95 in appeal pertaining to the A.Y. 1991-92, on identical facts, upheld the action of both the departmental authorities below regarding prima facie adjustment made in intimation Under Section 143(1)(a) as well as levy of additional tax Under Section 143(1A). The relevant observation are contained in para 23 to 25 which are reproduced hereunder:-
23. Regarding the reliance placed by the ld. counsel on the Supreme Court decision in Hindustan Electro Graphite Ltd.'s case supra, we are of the view that the said decision has been rendered by the Hon'ble Supreme Court on the facts of the case the assessee public limited company had received in the previous year relevant to the A.Y. 89-90 a sum of Rs. 1,31,41,030/- by way of cash assistance. Cash assistance received by any person on exports could not be charged to income-tax before insertion of clause (iiib) in Section 28 of the I.T. Act Clause (iiib) was introduced by the Finance Act 1990, restrospectively w.e.f. April 1, 1967 provided for the treating cash assistance as business income Under Section 28. On the basis of these facts, the Supreme Court held that when the return was filed, cash assistance was not included in the total income in the absence of any such provision like clause (iiib) and subsequent insertion of the caluse (iiib) would not make the assessee liable to additional tax Under Section 143(1)(a). We are inclined to accept the submission of the ld.DR that this decision dealing with a retrospective insertion of a charging Section would not be applicable in the facts of the instant case and the case of the assessee would be governed by the subsequent decision of the Hon'ble Supreme Court rendered by a Full Bench in the case of J.K. Synthetics Ltd. Supra. The Supreme Court upheld the adjustment Under Section 143(1)(a) as well as levy of additional tax Under Section 143(1A) and held that the fact that Explanation has been inserted subsequently by the legislature would not in any manner cut down the scope and ambit of the jurisdiction vested with the AO Under Section 143(1)(a). Explanation below Section 36(1)(vii) has been made operative w.e.f. 1.4.89 and would therefore apply with full force for A.Y.91-92 under appeal.
24. Before parting with the matter, we may point out that the Supreme Court decision in J.K. Synthetics Ltd's case has been rendered by a Bench of three Judges and it has referred to the earlier decision in Hindustan Electro Graphite's case and express reservations about the correctness of the said judgment. Since the issue involved before us is folly covered by the ratio of Full Bench decision in J.K. Synthetic's case we respectfully follow the same in view of the constitutional directive contained under Article 141.
25. For the aforesaid reasons, we hold that the adjustment made by the A.O. Under Section 143(1)(a) disallowing the claim of deduction of Rs. 8,91,310/- in respect of provision for doubtful debts is liable to be upheld. We uphold the same and reverse the finding of the Id. CIT(A). The appeal of the revenue is allowed.
5. It is pertinent to note that in the case of Mamta Machinery P. Ltd. (supra) the prima facie adjustment were made by the A.O. by disallowing an amount of Rs. 891310/- in respect of provision for doubtful debt while processing the return of income Under Section 143(1)(a)for the A.Y. 1991-92. In that case also the bad debts were not written off in accordance with the explanation below Section 36(1)(vii) and the claim of deduction was not allowed by A.O. keeping in view the Explanation below Section 36(1)(vii) inserted by the Finance Act 2001 with effect from 1-4-89 which provides that any provision for bad and doubtful debt would not qualify as permissible deduction Under Section 37(1)(vii) of the I.T. Act.
6. The Hon'ble Gujarat High Court in the case of Sayaji Iron and Engg. Co. v. CIT reported in 253 JTR 749(Guj) has held that decision of earlier co-ordinate Bench is binding on subsequent Bench and in case of dis-agreement matter be referred to Hon'ble President of Tribunal so that he could have the case referred to a Bench consisting of three or more. Members for which there is provision in the I.T. Act itself. I am therefore of the view that the Tribunal has no option either to follow the decision of IT AT, C-Bench, Ahmedabad in the case of Mamta Machinery Pvt. Ltd. (supra) or refer the same to larger Bench in accordance with provisions contained in Section 255(4) of the IT. Act, 1961.
7. In view of the foregoing I am of the view that prima facie adjustment in intimation Under Section 143(1)(a) was correctly made by A.O. The levy of additional tax Under Section 143(1A) is also in accordance with the judgment of Apex Court in the case of J.K. Synthetics Ltd. (supra) as well as decision of this Tribunal in the case of Mamta Machinery Pvt. Ltd. (supra), I accordingly hold that ld. CIT(A) is fully justified in upholding the levy of additional tax Under Section 143(1A) of the I.T. Act, 1961.
8. In the result, the appeal of the assessee in ITA No. 698/Ahd/95 is dismissed.
T.N. Chopra, Accountant Member
1. These two appeals have been filed by the assessee against the consolidated order of the CIT(A) dated 11-1-1995 for AY 1998-91 whereby part relief has been allowed in the quantum appeal and adjustment made Under Section 143(1)(a) has been upheld. Since both the appeals relating to the same assessment year have been heard together, these are being disposed of by a single order.
2. First we take up ITA No. 698/Ahd/1995 relating to upholding of adjustment made by the AO Under Section 143(1)(a). The assessee filed a return of income on 20-12-90 showing total income of Rs. 3,52,306/-. The AO, while processing the return Under Section 143(1)(a) made an addition of Rs. 1,30,815/- on account of bad debts debited to P&L Account and corresponding credit made to bad debt reserve account. The AO also charged additional tax Under Section 143(1A). The assessee filed an application Under Section 154 which has been rejected by the AO. The learned CIT(A) upheld the action of the AO.
3. We have considered the matter. The two Gujarat High Court decisions cited by the learned counsel viz. 130-ITR-95 and 143-ITR-166 laid down the proposition that if the assessee posts debit entries in P&L Account and credit entries in bad debt reserve account, the necessary conditions for write off as contained Under Section 36(1)(vii) would be treated as complied with. However, Explanation has been inserted below Section 36(1)(vii) by the Finance Act, 2001 with effect from 1-4-89 which provides that any provision for bad and doubtful debt would not qualify as permissible deduction Under Section 36(1)(vii). In view of the retrospective amendment of the law, the adjustment made by the AO is in order. However, in so far as the additional tax charged Under Section 143(1A) is concerned, the issue is squarely covered by the derision of the Hon'ble Supreme Court in the case of CIT v. HEG 243-ITR-48. The Hon'ble Supreme Court held that any adjustment made on the basis of subsequent amendment of law made after the filing of the return would not lead to charging of additional tax Under Section 143(1A). According to the Supreme Court when the return was filed, the claim of deduction/exemption claimed by the assessee was a bonafide claim in accordance with the existing law on that date and therefore the asssessee cannot be penalized by charging additional tax on the basis of subsequent amendment of law. Respectfully following the aforesaid decision of the Supreme Court, we hold that no additional tax Under Section 143(1A) would be charged by the AO. The appeal of the assessee is -H partly allowed.
4. Now we take up ITA No. 697/Ahd/1995. Ground No. 1 is gener in nature.
5. Ground No. 2 is against sustaining the trading addition of Rs. 7,29,378/-. The assessee is a partnership firm doing business of trading in dyes and chemicals. The firm is an authorised agent of Sandoz Limited. For AY 1996-91, the assessee disclosed GP of Rs. 12,88,523/- on total sales of Rs. 1,60,82,353/- which works out to GP rate of 8.01% In the immediately preceding asstt. year the assessee had shown GP rate of 11.87% on total sales of Rs. 1,59,72,512/-. When called upon to explain the reasons for decline in GP rate, the assesses explained vide its letter dated 17-11-92 that there was a substantial proportionate increase in the turnover as compared with ' the preceding asstt. year which comprised accounting year of 21 months. The assessee further explained that it has paid discount of Rs. 4,77,535/- to the customers as against Rs. 2,64,053/- paid in the preceding asstt. year. According to the assessee, it has received bonus commission of Rs. 3,42,498/- from Sandoz Limited on account of substantial enhancement of turnover achieved during the year. According to the assessee if the bonus commission is taken inter consideration, the GP would work out to 9.93% as compared with 12.32% in the preceding year. The assessee enclosed with its letter dated 17-11-92 billwise details of purchase and sales giving quantity as well as particulars of the product sold/purchased. A copy of assessee's letter dated 17-11-92 furnished during the assessment proceedings is placed in the paper book filed by the learned counsel during the course of hearing before us at pages 5 to 9. Billwise details of purchase and sales enclosed with the aforesaid letter dated 17-11-92 have also been furnished during the hearing by the assessee in a separate paper book from pages 1 to 104. The assessee explained before the AP that the quantity accounts have been maintained for each quality of product dealt in by the assessee and complete books of account like cash book, ledger, purchase book, sales book and stock register have been maintained. In the audit report furnished by the assessee alongwith the return of income in prescribed form No. 3CB, as per the provisions of Section 44AB of the Act, auditors have stated that the stock register as well as other books of account, are maintained by the assessee. The AO, however, rejected the books of account on the ground that the figures of purchase and sales given in the monthly summary by the assessee by way of enclosing with its letter dated 17-11-92, did not tally with the figures reflected in the trading account and further that the quantities of purchases and sales in kg have not been given. The AO accordingly rejected the books of account and adopting the GP rate of 11.87% made an addition of Rs. 7,29,378/-.
5.1 In appeal, the learned CIT(A) sustained the impugned trading addition on the ground that the discrepancies pointed out by the AO regarding the difference in figures of purchases and sales as well as decline in GP rate during the year have not been explained.
5.2 The learned counsel for the assessee filed two separate paper books containing the documents and papers earlier filed before the Revenue authorities and argued that the learned CIT(A) has proceeded to sustain the trading addition without considering the facts and evidence available on record like the quantitative stock tallies furnished during the assessment proceedings, details of purchase and sales for the year giving particulars like weight and quality of the product. The learned counsel argued that the assessee has maintained complete books of account including the quantitative stock tallies with regard to different types of product dealt 'in during the year and no discrepancies in the accounts have been found by the AO. The learned counsel referred to the statutory audit report as per provisions of Section 44AB enclosed with the return wherein the maintenance of stock records has been certified by the auditors. Regarding discrepancies in figures of sales and purchase furnished during the assessment proceedings as compared with the trading account, the learned counsel invited our attention to the reconciliation furnished in the statement of facts vide para-2.3 enclosed with the Memo of Appeal which reads as under:
As per letter dated 17/11/92 1,50,86,861=73
Less: Goods Returned to Sandoz 2,60,944=87
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As per trading account 1,48,05,916=86
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As per letter dated 17/11/92 1,64,01,896=90
Less: Goods Returned to sandoz 2,40,922=75
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1,61,60,974=15
Less: Sales-tax & Sur-charege 78,621=25
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As per trading account 1,60,82,352=90
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The learned counsel pointed out that the reconciliation furnished by the assessee has been taken noted by the learned CIT(A) vide para-2.3 of the appellate order and even after reconciliation of the figures as made by the assessee, the learned CIT(A) goes on say that no explanation has been furnished by the assessee. The learned counsel in this connection invited our attention to the details of purchase returned as well as sales returned by the assessee placed at pages 28 to- 24 of the paper book. With regard to rejection of books of account the learned counsel pointed out that detailed books of account have been maintained and without pointing out any discrepancy therein, the provisions of Section 145 can not be invoked merely on the ground of decline in GP. According to the learned counsel the decline in GP has been duly explained before the AO, as per assessee's letter dated 17-11-92 as well before the CIT(A). The learned counsel pleaded that the impugned addition sustained by the CIT(A) may be delebed.
5.3 The learned DR, on the other hand, supported the impugned add i t i on.
5.4 We have considered the rival submissions and gone through the orders of the Revenue authorities below as well as paper books filed by the learned counsel. From the facts on record it is evidently clear that complete quantitative sbock details have been maintained by the assessee including stock register. The maintenance of stock registers have been certified by the auditors in the audit report in prescribed form No. 3CD as per provisions of Section 44AB enclosed with the return of income filed by the assessee. The assessee has also furnished along with its letter dated 17-11-92 billwise 'details of purchase and sales indicating therein the particulars regarding the products name, -quantity, amount as well as names of the parby. Once the assessee has maintained complete quantitative records, there is no occasion for the AO to reject the books of account merely on the basis of low GP. Even with regard to decline in GP the assessee has explained that there is steep rise in the turnover inasmuch as the turnover in the asstt. year under appeal is Rs. 160.82 lacs whereas for the preceding asstt. year which comprised period of 21 months the turnover is Rs. 159,73 lacs. The assessee has explained that substantial increase in the turnover has been achieved and discount to the customers has been allowed at Rs. 4,77,535/- as against Rs. 2,64,053/- allowed last year. This would naturally depress the GP rale. The assessee has however received enhanced bonus commission from Sandoz Ltd. amounting to Rs. 3,42,498/- on account of enhanced...turnover. These facts duly explained by the assessee during the I assessment proceedings have been ignored by the AO as well as CIT(A) while sustaining the impugned addition in the trading account. Regarding the discrepancies in the figures of purchase and sales furnished during assessment proceedings as compared with the figures reflected in the trading account we find that the discrepancies have been reconciled as per reconciliation statement reproduced in para-3.2 of the appellate order by the CIT(A). The assessee has furnished billwise details of purchase returns and sales returns in support of the reconciliation of figures. It is further relevant to note that the auditors have certified in the audit report that the balance sheet as well as P&L Account for the year under reference are in agreement with the books of account maintained by the assesses. It appears to us that the explanation furnished by the assssee has not been considered in the right perspective by the learned CIT(A) while sustaining the disallowance. In our opinion, there is absolutely no justification for rejecting the books of account when the complete books of accounts including stok records have been maintained and no discrepancies in the accounts have been pointed out by the AO. Mere lowness of GP can not justify rejection of such books of account. In our opinion, the assessee has furnished cogent explanation on various points raised by the Revenue authorities including reasonableness of GP as well as the difference in the purchase and sales figures as compared with the trading account furnished by the assessee. We would accordingly delete the impugned addition of Rs. 7,29,378/- and allow the ground of appeal.
6. Ground No. 3 is against sustaining the disallowance of secret V commission of Rs. 1,19,895/-. The assessee expressed it inability before the AO to furnish the details of payments of secret commission. According to the assessee, since the commission, was paid to the employees of the customers, business expediency demands that such names may not be disclosed. The AO disallowed the commission. The 1 disallowance has been sustained by the learned CIT(A) relying upon the decision of the Hon'ble Supreme Court in the case of French Dyes and Chemicals India P Ltd. s CIT (201-IR-253).
6.1 The learned counsel, assailing the impugned disallowance argued that the Tribunal in assessee's own case has upheld the disallowance to the extent of 50% of the commission. A copy of Tribunal's order is placed at pages 31 to 35 of the paper book. In the case of sister concern Vyas & Co. v. ACIT (1995) 52-TTJ (And) 398. similar view has been taken by the Tribunal sustaining the disallowancxe to the extent of 58% of commission. The learned counsel pleaded that even if the entire disallowance is not to be deleted, the decision of the Tribunal for the earlier year may be followed.
6.2 The learned DR, on the other hand, supported the impugned order of the CIT(A).
6.3 We have considered the rival contentions and are inclined to uphold the disallowance of secret commission of Rs. 1,19,895/-. During the course of hearing, we brought to the notice of the learned counsel the decision of Ahmedabad Bench of Tribunal in the case of M/s Patel Brothers in ITA No. 2326/Ahd/2000 dated 7-2-2000 in which one of us (AM) was a party. In this decision, after detailed review of the case law on the subject and taking into consideration Explanation appended below Section 37(1) by the Finance (No. 2) Act, 1998 with retrospective effect, it has been held that the twin facet of the issue viz. genuineness as well as legality of the payment would have to be considered while adjudicating the issue of deduction of secret commission. Respectfully following the aforesaid decision in the case ' of Patel Brothers and in the context of identical facts and circumstances of the case, we would uphold the disallowance of secret commission. In support of the view being taken by us reliance is placed on the recent judgement of the Hon'ble Orissa High Court in the case reported in 174-CTR (Orissa) 509. Regarding the decision of the Tribunal in the assessee's case for earlier year, we may point out 1 that in the said decision the applicability of Explanation to Section 37(1) has not been considered and therefore the said decision would not be applicable. The disallowance is therefore upheld and the ground is dismissed.
7. Ground No. 4 is against sustaining the disallowance of commission of Rs. 3,00,110/- paid to M/s Mahavir Fabrics P Ltd. and Rs. 50,089/- paid to Shri Suresh Jain. The AO has dealt with the issue vide para-6 of the assessment order. During the year the assesses debited sales commission aggregating to Rs. 4,49,041/- paid to the following parties:
1. Mahavir Fabrics Rs. 3,00,110
2. General Dye Chem Rs. 48,781
3. General Trading Co. Rs. 50,860
4. Sureshkumar Shermalji Rs. 50,089 During the course of assessment proceedings the assessee filed details of commission paid to the aforesaid parties including inter alia appointment letter of Commission Agent M/s Mahavir Fabrics P Ltd. Similar appointment letter of Commission Agent Sureshkumar Shermalji Jain alongwith list of parties to whom goods have been sold through Sureshkumar Shermalji were furnished before the AO. These details are placed in the paper book filed by the learned counsel at pages 36 to 66. The assessee explained that the sales commission has been paid through Account Payee Cheques and all the above parties are assessed to income-tax and have duly shown the receipt of commission in their total income. The AO allowed the commission payments to two parties viz. General Dye Chem and General Trading Co. whereas regarding the remaining two parties, the commission has been disallowed by the AO mainly on the following grounds:
(a) The assessee has appointed M/s Mahavir Fabrics P Ltd. as Commission Agent on 14-4-89 and on the same date an amount of Rs. 3,00,110/- on account of commission has been credited to his ' account.
(b) The statement of Shri Shantibhai, Managing Director has been recorded which indicates that he does not have any knowledge regarding the parties to whom sales have been made through his agency.
(c) Shri Shantibhai failed to produce records relating to commission payments.
(d) M/s Mahavir Fabrics P Ltd. is not regular Commission Agent of Dyes and Chemicals.
(e) The AO also recorded the statement of managing partner of M/s Moontex Dyeing House wherein it is stated that the said concern had purchased colour and chemicals directly from the assessee and not through any Commission Agent.
(f) The parties to whom the sales have been made are mostly regular customers of the assessee and there was therefore no necessity for paying any commission in relation to such purchases.
(g) M/s Sandoz Ltd. is a reputed manufacturer of colour and chemicals and the asseasee, as s Distributor of the said Company, did not require the services of a Commission Agent for making sales in the market.
On the basis of the above grounds, the AO held the commission payments to two parties viz. Mahavir Fabrics P Ltd. Rs. 3,00,110/- and Sureshkumar Shermalji Rs. 56,089/- as non-genuine and disallowed the same.
7.1 In appeal, the. CIT(A) reiterated the points mentioned by the AO in support of disallowance of commission and thereby sustained the disallowance.
7.2 The learned counsel, assailing the impugned disallowance, made strong grievance of the fact that the AO has recorded the statements of Shri Shantibhai, MD of Mahavir Fabrics P Ltd. as well as Sureshkumar Shermalji at the back of the assessee and in gross violation of the principles of natural justice and utilised the evidence so collected at the back of the assessee for making the impugned disallowance of commission. The learned counsel submitted that the CIT(A), while sustaining the impugned disallowance, totally ignored the contention of the assessee that the evidence collected at the back of the assessee has been utilised by the AO without allowing any opportunity to rebut the same. The learned counsel further submitted that the AO has himself allowed the commission to two parties viz. General Dyes Chem and General Trading Co. whereas on identical facts; the commission payments made to remaining two parties viz. Mahavir Fabrics P Ltd. and Sureshkumar Shermalji have been disallowed on arbitrary grounds. The learned counsel further submitted that Mahavir Fabrics P Ltd. as well as Sureshkumar Shermalji are assessed to tax and the commission payments are made through Account Payee Cheques and both the parties have duly shown the commission in their books of accounts and such commission payments have been assessed to tax by the Revenue authorities. According to the learned counsel M/s Mahavir Fabrics P Ltd. is a Private Limited Company and has received brokerage and commission from various parties aggregating to Rs. 7,49,129/- as per details placed at page 42 of the paper book filed by the learned counsel. According to the learned counsel, the AO has chosen to disallow commission payments in the assessee's case whereas under similar facts such commission payments made to Mahavir Fabrics P Ltd. have been allowed by the AO in the case of sister concern viz. Vyas & Co. The learned counsel invited our attention to page 45 of the paper book which indicates that the said company M/s Mahavir Fabrics P Ltd. has shown net profit as per profit & loss account at Rs. 6,65,500/- for AY 1990-91. Similarly the learned counsel invited our attention to page 66 which indicates that the second party viz. Sureshkumar Shermalji has disclosed the commission received from the assessee in the return of income for AY 1990-91. On these facts the learned counsel argued that the payments of commission are genuine and deserve to be allowed.
7.3 The learned DR, on the other hand, placed reliance on the order of the CIT(A) and urged that adequate evidence has been brought on record by the AO to establish the non-genuineness of payments of commission.
7.4 After careful consideration of the rival submissions and going through the orders of the Revenue authorities below as well as the papers and documents contained in the paper book to which our attention has been invited during the course of hearing, we feel that the impugned addition made by the AO and sustained by the CIT(A) suffers from a patent infirmity inasmuch as the evidence collected at the beck of the assessee by the AO has been utilised against the assessee. This is unquestionably violative of the principles of natural justice as well as the express provisions of Section 142(3) of IT Act. The statements of Shri Shantibhai, MD of Mshsvir Fabrics P. Ltd. as well as Sureshkumar Shermalji have been recorded by the AO at the back of the assessee and the same have been utilised without confronting the assessee with the evidence so collected particularly when the assessee has furnished confirmations acknowledging the receipt of commission from both the parties viz. M/s Mahavir Fabrics P Ltd. and Sureshkumar Shermalji who are assessed to tax, have duly shown the commission income in their returns. We feel that the entire issue of disallowance of commission would need to be remitted back to the file of the AO for fresh adjudication. The AO would confront the assessee with the statements etc. recorded at the back of the assessee and allow specific opportunity to the assessee to make submissions in rebuttal, if any. The AO would also look into the assessment records of M/s Mahavir Fabrics P Ltd. as well as Sureshkumar Shermalji for necessary verification regarding the receipt of commission from the assessee. The entire issue would be examined afresh by the AO and decided on the basis of facts and evidence brought on record and considering the submissions of the assessee in respect thereof. The ! issue is therefore restored back to the file of the AO for fresh decision.
8. Ground No. 5 is against sustaining the disallowance of Rs. 50,200/- and interest of Rs. 5992/- on account of deposit in the names of children of the partner has not been pressed and is therefore ' dismissed.
9. Ground No. 6 is regarding the disallowance of printing expenses of Rs. 22,320/- treating as capital expenditure by the AO. The assessee incurred expenditure of Rs. 22,320/- on account of printing and stationary expenses. The expenses have been treated by the AO as capital expenditure on the ground that the items purchased are part of Computer. On behalf of the assessee it has been pointed out that the expenses are not part of Computer and have been incurred for printing sales bills of the assessee. The details of expenses are placed in the paper book filed by the learned counsel at pages 67, 68 and 69. We are inclined to agree with the learned counsel that the expenses are revenue in nature and the disallowance of Rs. 22,320/- is therefore deleted. Ground is allowed.
10. Ground No. 7 is against sustaining the disallowance of bad debts of Rs. 1,30,815/-. In so far as this ground is concerned, we have already held that in view of Explanation inserted below Section 36(1)(vii) by the Finance Act, 2001 with effect from 1-4-81, the claim of bad debt can be allowed only if the debt is written off by passing entries in the accounts of the debtor. In the instant case the assessee has crested the reserve account and not passed entries in the accounts of the debtors. The disallowance has therefore rightly been made. The ground is dismissed.
11. Ground No. 8 reads as under:
On the facts & in the circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of the AO in disallowing vehicle expenses of Rs. 2,942/- and depreciation thereon of Rs. 1409/-.
11.1 Looking to the smallness of expenses and the extent of business turnover of the assessee, the disallowance out of vehicle expenses as well as depreciation thereon is hereby deleted. The ground is allowed.
12. Ground No. 9 against disallowance of Rs. 4000/- on account of rent is not pressed and is therefore dismissed.
13. Ground No. 10 is against sustaining the disallowance of Rs. 20,000/- by the AO Under Section 37(2A). The expenses aggregating to Rs. 61,631/- have been debited under the head "office expenses" as per details available in the paper book from pages 78 to 84. These expenses are mostly on account of tea, coffee, cold drinks and snacks etc. Certain other expenses like Municipal Tax etc have also been debited to this account. The assessee stated that the expenses pertain to tea, coffee and snacks etc. served to the employees of the assessee firm in the office premises and do not fall under the head "Entertainment Expenditure". The AO however held that the expenses to the extent of Rs. 25,000/- relate to entertainment of customers and accordingly disallowed an amount of Rs. 20,000/- after allowing exemption of Rs. 5000/- as per provisions of Section 37(2A). The CIT(A) upheld the disallowance.
13.1 We have considered the matter. In our opinion, the disallowance made by the AO is excessive. We would sustain the disallowance to the extent of Rs. 5000/- and delete the balance addition of Rs. 15,000/-. Ground is partly allowed.
14. Ground No. 11 is regarding levy of interest Under Section 234A and 234B. The learned counsel submitted that a consequential effect in respect of computation of interest may be allowed. We hold accordingly. The AO would recompute the interest Under Section 234A and 234B on the basis of income finally assessed.
5. In the result, both the appeals are partly allowed..