Income Tax Appellate Tribunal - Mumbai
Dy. Commissioner Of Income-Tax, Sr-I vs Bifora Watch Co. Ltd. on 28 April, 2005
Equivalent citations: [2005]94ITD203(MUM), (2005)96TTJ(MUM)393
ORDER
Vimal Gandhi, President
1. The learned Members of Income-tax Appellate Tribunal, 'D' Bench Mumbai on account of difference have referred the following question for consideration under Section 255(4) of the Income-tax Act:-
"Whether, on the facts and in the circumstances of the case the plea taken by the assessee before the Tribunal in regard to Investment Allowances are admissible under Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 and whether on that basis the adjustment made by the A.O. under Section 143(1)(a) of the Income-tax Act, 1961 can be deleted by the Tribunal."
2. From the reference it appears that question has been referred in both the assessment years i.e. assessment years 1989-90 and 1990-91 but alleged disallowance of Rs. 2,31,49,567/- through "adjustment" under Section 143(1)(a) of investment allowance is involved only in assessment year 1989-90 and not in the other assessment year. The learned representatives of the parties also agreed that the difference between learned Members is confined to the above assessment year on the specified amount and restricted their arguments accordingly. I therefore, proceed to consider the above difference in assessment year 1989-90 only.
3. The Assessing Officer purporting to have disallowed Rs. 2,31,49,567/- claimed by the assessee as investment allowance in "adjustment" and issued show cause notice to the assessee why additional tax be not levied on the assessee in terms of Section 143(1A) of the Income-tax Act on the disallowances made. The assessee thereafter moved application under Section 154 of the Income-tax Act challenging the disallowance and adjustments made by the AO under Section 143(1)(a) of the Income-tax Act determining loss of the assessee at Rs. 8,42,09,358/-. The AO in his order under Section 154 of the Income-tax Act dated 12 August, 1991 maintained that assessee did not create any "reserve" and therefore, claim of investment allowance was rightly disallowed. There was no mistake in the order requiring rectification in the intimations sent under Section 143(1)(a) of the Income-tax Act. In line with the above view, the AO also imposed additional tax on the assessee in terms of Section 143(1A) of the Income-tax Act on disallowances including Rs. 2,31,49,567/-.
4. The assessee impugned above levy in appeal before the learned Commissioner of Income-tax (Appeals) and contended that as returned and assessed figure was a "Loss" and no tax was payable by the assessee, the question of levy of additional tax did not arise. The learned CIT(A) in the light of decision of Hon'ble Punjab & Haryana High Court in the case of CIT v. Prithpal Singh & Co., 183 ITR 69, accepted above contention of the assessee and held that no additional tax was payable by the assessee under Section 143(1)(a) of the Income-tax Act as no tax was payable by the assessee in both the assessment years i.e. 1989-90 and 1990-91. Question of recovering additional tax did not arise.
5. After holding that the assessee's grievance no longer survived in view of his finding that no additional tax was payable, the learned CIT(A) for the sake of completeness, proceeded to consider disallowances made on merits. In respect of disallowance of investment allowance amounting to Rs. 2,31,49,567/-, the learned CIT(A) held that adjustment made by the AO was in order, "as admittedly the assessee was not entitled to this deduction for the assessment year 1989-90. The assessee had not created the requisite reserve and could not have been allowed deduction in investment allowance for the assessment year 1989-90." The adjustment of investment allowance was accordingly upheld.
6. The revenue challenged cancellation of levy of additional tax under Section 143(1A) of the Income-tax Act in appeal before the Appellate Tribunal. The ground raised by the revenue is reproduced by the learned Accountant Member in his proposed order. The assessee did not file any appeal or cross objection against the order of the learned CIT(A).
7. During the course of hearing of appeal before the appellate tribunal the revenue brought to the notice of the Bench the retrospective amendment made to Section 143(1A) of the Income-tax Act and contended that additional tax was leviable even where loss claimed was reduced on account of adjustment made under Section 143(1)(a) of the Act. This contention advanced does not appear to have been seriously opposed on behalf of the assessee. On the other hand, the assessee sought to rely on Rule 27 of the Income-tax (Appellate Tribunal) Rules and sought to support the order of the learned CIT(A) by arguing that adjustment/disallowance of Rs. 2,31,49,567/- was wrong and could not be made under Section 143(1)(a) of the Income-tax Act. The adjustment made was beyond jurisdiction. If adjustment would not be made, question of levy of additional tax did not arise. This way impugned order was supported.
8. The learned Accountant Member found ample force in the contention raised on behalf of the assessee and held in his proposed order that the assessee could support the impugned order of the CIT(A) by invoking Rule 27 of the IT(AT) Rules. He further observed that the assessee could create requisite reserve i.e. 75% of investment allowance in the year or years in which the same was to be actually allowed to the assessee in future. As the assessment year under consideration was a loss, there was no need for the assessee to create the statutory reserve. The investment allowance was required to be calculated and carried forward to be allowed in future. For the above view the learned Accountant Member relied upon Circulars of CBDT, Nos. 259 and 305, held to be binding on the revenue by Hon'ble Gujarat High Court in the case of Bharat Vijay Mills Ltd. (154 ITR 786) and by Hon'ble Patna High court in the case of Tata Robins Frazer Ltd. (163 ITR 886). In any case the learned Accountant Member further observed that there was not only a genuine deficiency but the discussion in proposed order would suggest that mere non-creation of adequate reserve would not call for a prima facie adjustment as envisaged under Section 143(1)(a) of the Income-tax Act. The AO was duty bound to give opportunity to the assessee to create additional reserve in subsequent years before making adjustments. Thus adjustment made by the AO was not in accordance with provision of Section 143(1)(a) of the Income-tax Act as also not in conformity with the view of Hon'ble Bombay High Court in the case of Khatau Junkar Ltd. (196 ITR 55). The learned Accountant Member accordingly deleted the disallowance in his proposed order.
9. The learned Judicial Member agreed with the deletion of all disallowances made through adjustments in assessment years 1989-90 and 1990-91 except deletion of additional income-tax in respect of adjustment of Rs. 2,31,49,567/- made in assessment year 1989-90. On above point, the learned Judicial Member reversed the order of the learned CIT(A) in his proposed order.
10. For the above view, the learned Judicial Member reproduced relevant provision of Rule 27 and observed that respondent under the above Rule is entitled to support the impugned order on the basis of ground decided by the lower authorities against respondent but the ground on which impugned order was sought to be supported must be one raised before the lower authorities. He observed that the assessee in this case did not challenge jurisdiction of the AO before the learned CIT(A) nor contended that the disallowance made was outside the scope of provisions of Section 143(1)(a) of the Income-tax Act. The assessee had merely challenged levy of additional tax before the CIT(A). The assessee was thus raising a totally new ground before the Tribunal, which did not fall within the purview of Rule 27.
11. The learned Judicial Member further observed that even if the assessee was permitted to raise above new ground, the same should not cause prejudice to the appellant as the cardinal principle was that an appellant should not be made worse off than before on account of having filed the appeal. According to the learned Judicial Member, if the assessee was permitted to raise above ground that he could create reserve for claiming investment allowance in any of the subsequent years, this would amount to granting relief or advantage to the assessee far in excess of relief originally allowed by the learned CIT(A). The learned Judicial Member further observed that before the learned CIT(A) the assessee had admitted that he was not entitled to investment allowance and that it was not assessee's case that reserve could be created in the subsequent year. For the aforesaid reasons the learned Judicial Member upheld levy of additional tax on adjustment of Rs. 2,31,49,567/- made by the AO under Section 143(1)(a) and consequent levy of additional tax under Section l43(1A) of the Income-tax Act on above adjustment.
12. On account of above difference the matter has come up in appeal before me as a Third Member.
13. I have heard both the parties. As stated earlier, the learned representatives of the parties confined their arguments to levy of additional tax on adjustment of Rs. 2,31,49,567/- made under Section l43(1)(a) read with Section 143(1A) of the Act in assessment year 1989-90. No other issue was raised before me.
14. The learned Departmental Representative argued that levy of additional tax was fully justified in view of retrospective amendment made in Section 143(1A) of the Income-tax Act. The matter now stood fully settled by the decision of the Hon'ble Supreme Court in the case of Asstt. CIT v. J.K. Synthetics (251 ITR 200) wherein levy of additional tax on reduced claim of loss allowed through adjustment has been upheld. The learned DR further submitted that disallowance of claim of investment allowance through adjustment was not challenged by the assessee in appeal as similar disallowance was made even in regular assessment under Section 143(3) by the AO vide order dated 13.11.1991. The issue therefore, had attained finality, but same was sought to be unsettled in appeal of the revenue before the ITAT by invoking provisions of Rule 27 of the Income-tax (Appellate Tribunal) Rules. The assessee having not filed any appeal or cross objection was not entitled to raise the issue and seek support of Rule 27. At any rate the disallowance made had become final and the department who was appellant could not be made worse for filing appeal before ITAT. The learned DR relied upon observations of the learned Judicial Member in his proposed order.
15. The learned DR further contended that plea relating to creation of reserve in subsequent year was never raised before the AO. It was for the assessee to produce evidence and establish that all conditions relating to claim of investment allowance were satisfied but no supporting evidence was produced in this case. No reserve was shown to have been created even in any subsequent years. It was a claim of loss and therefore, question of allowing investment allowance did not arise. The assessee made a wrong claim which was disallowed and therefore, he was rightly subjected to additional tax. The learned DR accordingly supported the proposed order of the learned JM.
16. The learned counsel for the assessee Shri Irani on the other hand, relied upon and supported the proposed order of the learned AM. He argued that similar disallowances were made in both the assessment years 1989-90 and 1990-91. The learned Judicial Member has agreed with the view of the learned Accountant 'Member in assessment year 1990-91 in the dismissal of the appeal for that year by invoking Rule 27 of the IT(AT) Rules. But for other assessment year 1989-90 a contrary view has been taken in the proposed order. The mere fact that adjustment in assessment year 1989-90 involved claim of investment allowance and in assessment year 1990-91 involved disallowance under Section 43B of the I.T. Act did not make any difference as far as application of Rule 27 of IT(AT) Rules was concerned. Thus contradictory view taken by the learned Judicial Member was not justified on facts and circumstances of the case.
17. The learned counsel further pointed out that the present assessee had suffered huge losses and on account of accumulated losses, no tax was payable by the assessee on account of disallowances made by the AO under Section 143(1)(a) or under Section 143(3) of the Income-tax Act. The assessee was aggrieved when asked to pay additional tax under Section 143(1A) of the Act. Learned counsel further pointed out that the learned CIT(A) had decided the matter on 15.1.1992. The revenue had filed the appeal before the Appellate Tribunal on 12.3.1992. The Legislature amended Section 143(1A) much later and after the period of limitation for filing appeal or cross objection before Tribunal was over. The assessee therefore, had to rely upon Rule 27 of the IT(AT) Rules at the time of hearing of the appeal.
18. The learned counsel further submitted that under Rule 27 of IT(AT) Rules respondent can support the order appealed against on any of the ground decided against him. The learned CIT(A) had upheld adjustment of Rs. 2,31,49,567/- claimed as investment allowance under Section 143(1)(a) of the Income-tax Act. The argument of the assessee before the Tribunal was that above ground was wrongly decided against the assessee by the learned CIT(A). It was accordingly contended that adjustment made was not permissible under Section 143(1)(a) of the Income-tax Act and therefore, question of levy of additional tax under Section 143(1 A) did not arise. The assessee accordingly supported the impugned order of the learned CIT(A). No further relief was claimed/asked for or allowed in the proposed order of the learned Accountant Member. The learned counsel stated that Hon'ble Kerala High Court's view in the case of CIT v. BPL Systems & Projects Ltd. (1997) 227 ITR 779, fully supports the view taken by the learned Accountant Member in the proposed order. Their Lordships as per the Head Note have held as under: -
"The assessee was a manufacturer of electronic equipment. For the assessment year 1979-80, the assessee claimed deduction under Section 37 of the Income-tax Act, 1961, as revenue expenditure, of a sum of Rs. 5 lakhs paid to a foreign company towards the acquisition of designs and drawings for the manufacture of power line carrying communication equipment. The Income-tax Officer disallowed the claim for deduction on the ground that the outright purchase of designs and drawings had secured to the assessee an advantage or benefit of an enduring nature notwithstanding the transient nature of the advantage, and obsolescence being faster in electronics industry than in other industries. The Commissioner (Appeals) held that since the assessee had imported a new system represented by designs and drawings and adapted it to suit the Indian conditions and in that process a number of subsidiary modules were developed and added to the Imported module and with that a perfect new system was brought into existence, the expenditure on drawings and designs was capital expenditure. The Commissioner (Appeals), however, allowed deduction to the assessee under Section 35 of the Act. The Tribunal held that since the assessee was engaged in the field of manufacturing certain equipment in the sphere of electronics and was found to have changed its technology very frequently, the expenditure incurred by the assessee in acquiring designs and drawings from the foreign company was for improving its efficiency or its profit earning apparatus, and the advantage, if any, was not of a permanent degree but shortlived in view of further vast developments in technology and, therefore, the advantage was not in the capital field. On a reference:
Held, affirming the decision of the Tribunal, that the expenditure incurred by the assessee on acquisition of designs and drawings was revenue expenditure."
19. Shri Irani further contended that observations of the learned Judicial Member that the assessee did not raise plea relating to creation of reserve in future before the AO or learned CIT(A), was not correct. He drew my attention to notes on return filed by the assessee, rectification application moved under Section 154 before the AO and the ground raised before the learned CIT(A). He also drew my attention to Circulars and decisions cited and relied upon by the learned Accountant Member in his proposed order. Alternatively, Shri Irani submitted that a highly debatable and controversial point was involved in the claim of investment allowance, which was beyond the purview of adjustment permissible under Section 143(1)(a) of the Income-tax Act. He relied upon decision of Bombay High Court in the case of Khatau Junkar Ltd. (supra). Shri Irani accordingly supported the proposed order of the learned Accountant Member.
20. I have given careful thought to the rival submissions of the parties and examined dissenting orders of the learned Members in the light of material available on record. In the case of CIT v. J.K. Synthetics (supra) their Lordships of Supreme Court examined provision of Section 143(1A) of the Income-tax Act amended retrospectively through Finance Act, 1993 with effect from April 1,1989 and held that substituted Sub-section (1A) has made it clear that even where the loss declared by an assessee had been reduced by reason of adjustment made under Sub-section (1)(a), the provision of Sub-section (1A) would apply. In the light of above authoritative pronouncement, no arguments were advanced before me that provision was not applicable in a case where no tax was payable. The contention advanced on behalf of the assessee and accepted by the learned Accountant Member in the proposed order was that adjustment of claim of investment allowance of Rs. 2,31,49,567/- under Section 143(1)(a) was not made in accordance with law and was not sustainable. Therefore, no additional tax under Section 143(1A) was leviable in this case. The learned Judicial Member did not agree with the above contention. This issue is required to be examined and decided.
21. However, before I proceed to examine above issue I have to examine application of Rule 27 of the IT(AT) Rules in this case. The learned CIT(A) in the impugned order, held that no additional tax was leviable in this case as resultant figure assessed was a loss and no tax was payable by the assessee. This view as noted above is unsustainable in the light of subsequent amendment made with retrospective effect. The assessee sought to support the order of the CIT(A) on the ground decided against the assessee. The said ground was the view of the learned CIT(A) that adjustment relating to claim of investment allowance amounting to Rs. 2,31,49,567/- was rightly made by the AO under Section 143(1)(a) of the Income-tax Act. The assessee sought to challenge aforesaid finding of the learned CIT(A). In my considered opinion the claim made by the assessee under Rule 27 of the IT(AT) Rules is quite in order. In case it is accepted that the AO could not make adjustment of Rs. 2,31,49,567/- under Section 143(1)(a) claimed as investment allowance, the question of levy of additional tax in terms of Section 143(1A) would not arise. Admittedly it is a case of assessed loss and no tax is payable by the assessee on account of adjustment made by the AO. The assessee is aggrieved only on account of additional tax demanded from the assessee. There is no question of allowing any relief to the assessee not claimed by the assessee in appeal before the CIT(A). The assessee has sought to non-suite the revenue by seeking a finding that no additional tax is payable by the assessee as adjustment of investment allowance is not valid under Section 143(1)(a) of the Income-tax Act. In case assessee's plea is accepted, it will result in dismissal of appeal of the revenue. The assessee would get no further relief as no tax was payable by him except the additional tax imposed under Section 143(1A) of the Act. This way the assessee is seeking to support the impugned order by raising a ground decided against the assessee. I do not see any reason to hold that Rule 27 could not be invoked in this case. Above view is fully supported by the decision of the Hon'ble Kerala High Court cited on behalf of the assessee.
22. In order to decide whether provisions of Section 143(1)(a) are applicable in this case, I have to refer to the claim made by the assessee. In the original return for assessment year 1989-90, the assessee did not include figure of investment allowance in the computation of total income though it gave following note in the return:-
"2. The company is entitled to Investment Allowance under Section 32A of the Income Tax Act 1961. In absence of Profit and particularly as there are heavy losses, the reserve has not been created. The same will be created in the year of profit. However the claim of Investment Allowance is being made for determination purposes.
Unabsorbed Loans & Depreciation to be Carried Forward to subsequent Assessment Year.
Business Loss : Rs. 77,82,268 Depreciation : As may be determined in the Investment Allowance Assessment Proceedings.
The losses of the earlier assessment year prior to this, may be allowed to be carried forward as per Assessment records."
In the revised return, the assessee added Rs. 2,31,49,567/- to the loss figure with similar note No. 2 above and requested for carry forward of the following:-
"Unabsorbed Loans & Depreciation to be Carried Forward to subsequent Assessment Year.
Business Loss : Rs. 89,48,935 Depreciation : Rs. 7,55,56,042 Investment Allowance : Rs. 2,31,49,567 subject to creation of reserve. "
The AO in the intimation issued under Section 143(1)(a) "disallowed" investment allowance of Rs. 2,31,49,567/- and deducted the same from returned loss of Rs. 10,76,54,544/- as "no-reserve had been created". The assessee thereafter moved rectification application dated 23.8.1990 (copy available at page 7 of the Paper Book), asking the AO to rectify above order. The above request was rejected by the AO holding that there was no mistake in the intimation issued by the AO relating to claim of investment allowance.
23. Thereafter the assessee filed an appeal before the learned CIT(A) and among other raised the following ground:-
"3) Deputy Commissioner of Income-tax has erred in considering the claim of Investment allowance in the returned total loss though it was clearly stated in the computation of total income that the investment allowance has been claimed for determination purpose."
It is evident from the notes in the returns as also from the contention raised before the learned CIT(A) that the assessee knew fully well that on account of loss, statutory reserves could not be created and therefore, there was no question of deduction of investment allowance. The assessee's case was that it had claimed that investment allowance be determined (computed) in accordance with law and carried forward as provided in the Statute. As far as creation of reserve was concerned, the same could be created in the subsequent years when investment allowance was to be "actually allowed". The claim made was fully supported by Circulars of CBDT and the statutory provisions. The learned CIT(A) in the impugned order held that the AO rightly disallowed the claim of investment allowance but simultaneously held that provisions of Section 143(1 A) were not applicable. He cancelled the levy of additional tax as noted above in detail.
24. In order to examine the contention whether Section 143(1)(a) is applicable, it is necessary to refer to provision of Section 32A of the Income-tax Act, under which "investment allowance" was allowed on cost of machinery or plant acquired by the assessee either in the year in which such machinery and plant was installed or in the immediately succeeding previous year in which plant or machinery was first put to use. Sub-section (3) of Section 32A provided that if in the relevant assessment year total income of the assessee was 'Nil' or less than full amount of investment allowance, the amount of investment shall be such amount as is sufficient to reduce total income to nil. The balance investment allowance (not adjusted) was required to be carried forward to the following assessment year. Sub-section (4) of Section 32A required that the assessee would create reserve of an amount equal to 75% of investment allowance to be "actually" allowed as "Investment Allowance Reserve Account" by debiting the amount to the profit & loss account. Explanation to said section provided that in case investment allowance reserve was deficient, the AO was to give notice to the assessee and allow time to him to make up the deficiency.
25. I am not making a detailed reference to the statutory requirement of creation of reserve account in the year of loss with reference to Section 32A as this issue has been discussed by several courts and is also covered by Circulars of CBDT referred to in the proposed order of the learned Accountant Member. In the case of CIT v. Tata Robins Frazer Ltd. (163 ITR 886) their Lordships of Patna High Court as per the head note have observed as under:-
"Non-creation of statutory reserve is a bar to allowance of development rebate, but is no bar to quantifying the rebate in terms of the law and carrying it forward. The expression "to be actually allowed" in Section 34(3)(a) of the Income-tax Act, 1961, clearly implies that certain sums will be allowed in future as development rebate in whole or in part. It is axiomatic that until the development rebate is quantified in the relevant assessment year after the installation of the machinery, there cannot be any question of carrying forward of the rebate. If it is not quantified, nothing will be available for carrying forward and the assessee will be denied the benefit of the rebate. The claim for development rebate has to be made by the assessee in the year of installation of the machinery. If in that year, the total income is a loss, the statutory reserve need not be created. Statutory reserve not having been created, development rebate will not be allowed, but the rebate to be actually allowed in future will be calculated and carried forward to the next assessment year. Development rebate will be allowed only in the year in which the statutory reserve is created. The outer limit for creation of the reserve and availing of the privilege of development rebate must be confined to eight years. This view is based not only upon the interpretation of Section 33 and 34 but also on the circulars of the CBDT which are binding on the Income-tax authorities." (Underlined to emphasize) Similar view has been taken by the Hon'ble Allahabad High Court in the case of CIT v. Raza Buland Sugar Company Ltd., 202 ITR 191 and by Hon'ble Punjab & Haryana High Court in the case of CIT v. Beco Engineering Co. (232 ITR 102). Their Lordships noted the amendment made in Section 34(3)(a) by Finance Act, 1990 with retrospective effect from April 1, 1962 to provide for non-creation of reserve account in the year of loss or insufficiency of profits in the year in which machinery or plant is installed or put to use. In the circular reproduced in the above quoted decision with reference to the view taken by their Lordships of the Supreme Court in Subhalaxmi Mills' case (1989) 177 ITR 193, it is stated as under:-
"Though the decision of the Supreme Court has been pronounced only with regard to the provisions of development rebate, it may apply equally to the grant of investment allowance. It is, therefore, proposed to provide by way of an amendment that the condition of creation of reserve even in a year of loss as laid down by the Supreme Court will not be mandatory in respect of both development rebate and investment allowance."
There is no dispute that provisions relating to creation of "reserve" are similar both in case of investment allowance and development rebate.
26. It is evident from above that under Section 34A the assessee could not claim deduction of investment allowance in the year of loss. He could not have created an "investment allowance reserve" in account in such a year although machinery and plant acquired might have been installed or put to use in that year. High Courts have clearly held that investment allowance is required to be quantified in the year in which machinery is installed or put to use and is required to be carried forward although total income is a "loss" and statutory reserve is not created. Investment allowance would be allowed only in the year in which statutory reserves are created and there is profit. The proposition that investment allowance is to be quantified even in case of loss and non-creation of reserve follows from use of expression, "to be actually allowed in Section 34(3)(a) of Income-tax Act" and other similar provisions. Thus there was nothing wrong with the claim of the assessee that investment allowance be determined (computed) to be carried forward for adjustment in the subsequent years. Investment allowance reserve would be created in the year investment allowance was to be actually allowed. The claim made by the assessee could not be treated as "prima facie" wrong and inadmissible and disallowed under Section 143(1)(a) of Income-tax Act. At any rate, the claim made was debatable and could not be rejected as done by the revenue authorities without providing opportunity of being heard to the assessee. The matter was beyond purview of Section 143(1)(a) of Income-tax Act. The learned Accountant Member has rightly held that decision of Hon'ble Bombay High Court in the case of Khatau Junkar Ltd. (supra) was attracted in this case. All other High Courts have taken a similar view of Section 143(1)(a) of Income-tax Act. The disallowance made was unjustified and rightly deleted by the learned Accountant Member.
27. The learned DR stated that disallowance was confirmed in the regular assessment of the assessee made under Section 143(3) of the Income-tax Act. Copy of said assessment has not been placed on record nor the learned Members in their dissenting orders have made any reference to such assessment. I therefore, make no comment on subsequent assessment, if any, made under Section 143(3) of the Income-tax Act on the point involved before me.
28. For the aforesaid reason I agree with the proposed order of the learned Accountant Member. The matter now be placed before the Regular Bench for passing an appropriate order in accordance with law.
ORDER
29. The Accountant Member has upheld the applicability of Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963, to both the years under consideration i.e. assessemed years 1989-90 and 1990-91, whereas the Judicial Member has held that Rule 27 will not be applicable in assessment year 1989-90 so far as the adjustments in respect, of investment allowance is concerned. Accordingly, the Accountant Member has deleted the addition of Rs 2,31,49,567/-where as the Judicial Member has upheld the levy of additional tax in-respect of adjustment of investment allowance. Hence, the matter is being referred to the Hon'ble President of the Income-tax Appellate Tribunal with a request that the following question may be referred to a Third Member or to Pass such orders as the President may desire :
"Whether, on the facts and in the circumstances of the case the plea taken by the assessee before the Tribunal in regard to Investment. Allowances are admissible under Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 and whether on that basis the adjustment made by the A.O under Section 143(1) (a) of the Income-tax Act, 1961 can be deleted by the Tribunal."
ORDER Pradeep Parikh, Accountant Member
30. These two appeals by the department are directed against the combined order of the learned CIT(A) dated 15-1-1992 for assessment years 1989-90 and 1990-91. As common issue is involved in both the appeals, they are being disposed off together by. this consolidated order for the sake of convenience. The common ground raised in both the appeals is as follows :
"On the facts and in the circumstances of the case and in law, the learned CIT(A) failed to appreciate that additional tax under Section 143(1A) is leviable if there is variation between the returned income loss and the income-loss finally determined on processing, the return under Section 143(1) (a) and thereby erred in holding that no additional tax is leviable under Section 143(1A) in the assessee's case where in adjustment made under Section 143(1)(a) has resulted in reduction in the amount of loss returned."
31. Assessee company returned a total loss of Rs. 10,70,54,544/- and Rs. 7,61,09,733/- for the two years respectively. Both the returns were processed under Section 143(1) (a) of the Income-tax Act, 1961 (the Act). While processing the return under Section 143(1) (a), A.O made the following disallowances for assessment year 1989-90.
1. Disallowance of Investment allowance 2,31,49,567 on account of non-creation of reserve
2. Under Rule 6D 74,230
3. Payment to Diners club 1,000
4. Under Section 43B - ESIS 2,552
5. Entertainment expenses 2,17,837
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2,34,45,186
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Thus, the adjusted total loss for assessment year 1989-90 amounted to Rs 8,42,09,358/-. Similarly, for A.Y 1990-91, A.O made the following disallowances.
(1) Under Section 43-B (a) Surcharge, Madras 287
(b) Sales-tax - Factory 29,356
(c) CST - Factory 8,256
(d) Sales-tax - Hyderabad 7,500
(e) Interest on term loan from financial institution 73,56,473
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74,01,872
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(2) Depreciation allowed was Rs 2,61,68,512/- as against assessee's claim of Rs. 4.11 crores.
Thus, after making the above adjustments and correcting an arithmetical error, adjusted total loss amounted to Rs. 5,75,19,973/-.
32. Objecting against some of the adjustments made by the A.O., assessee filed an application under Section 154 in respect of both the years. However, A.O rejected all the objections of the assessee and retained the same adjusted loss as was determined under Section 143(1)(a) for both the years.
33. Being aggrieved by the order under Section 154, assessee preferred an appeal before the CIT(A) . Besides challenging the levy of additional tax, assessee also challenged the orders under Section 154 on merits. CIT(A) noted that though the assessee had a large number of arguments to raise, main argument was against levy of additional tax and hence proceeded to deal with the main argument only. The main argument was that in a case where returned loss was reduced to a smaller loss in the intimation under Section 143(1) (a), no additional tax could be levied under Section 143(1a). CIT(A) accepted the contention of the assessee by relying on the decision of the Punjab and Haryana High Court in the case of CIT v. Prithpal Singh & Co. (183 ITR 69). Though the said decision was in the context of Section 271(1)(c) of the Act, CIT(A) noted that Explanation to Section 143(1a) was identically worded as in Section 271(1)(c). Reliance was also placed on the decision of the Delhi High Court in the case of Mody Cement Ltd. wherein it was held that no additional tax could be levied under Section 143(1A) in a case where adjustments resulted merely in reduction of returned loss to a smaller figure and if no tax was payable on the income even after prima facie adjustments. Thus, for both the assessment years under appeal, CIT (A) cancelled the levy of additional tax.
34. The CIT(A) then went on to record that though the assessee's grievance no longer survived, for the sake of completeness he would deal with the disallowances on merits Accordingly, he dealt with the merits, allowed a few and disallowed the rest in both the years under appeal. Assessee has not preferred an appeal before the tribunal since on substantial ground that it is not liable to pay additional tax, it had succeeded. However, department was aggrieved by the order of the CIT(A) and hence this appeal.
35. Shri A.K. Tiwari, the learned D.R., submitted the he order of the CIT(A) cannot survive in view of the respective amendment made to Section 143 (1A) of the Act. The retrospective amendment, in substance, provides that assessee will be liable to pay additional tax even in a case where there is reduction in returned loss on account if adjustments made under Section 143(1)(a) of the Act. therefore, it was submitted by Mr. Tiwari that the appeal of the revenue be allowed.
36. At this juncture, Mr. F.V. Irani, the learned counsel for the assessee invoked Rule 27 of the Income-tax Appellate Tribunal) Rules, 1963 (ITAT Rules for short), contending that under the said Rule, assessee was entitled to support the order of the CIT(A) on the merits of the adjustments decided against it. Mr. Tiwari objected to Mr. Irani's contention on the ground that nothing survived for the assessee in view of the retrospective amendment, particularly when assessee has not preferred any appeal against the order of the CIT(A).
37. We are not aware of a direct decision in a case where a retrospective amendment is brought about in the statute in favour of the appellant and where the respondent has invoked the provisions of Rule 27 of ITAT Rules. However, on due consideration of the matter, we are of the view that Mr. Irani has rightly invoked Rule 27 to argue on merits against the various grounds decided against the assessee by the CIT (A) . It has to be noted that this Rule only incorporates the provisions with regard to appeals and cross-objections contained in order XLI of the Civil Procedure Code, and as held by the Bombay High Court in the case of New India Life Assurance Co. Ltd. v. CIT (31 ITR 844), the position of the Appellate Tribunal is the same as a court of Appeal under the Civil Procedure Code and the powers of the Appellate Tribunal are identical with the powers enjoyed by an appellate court under the Code (at page 855 of the Report). The High Court (at pages 857 and 858 of the Report) emphasised that the Tribunal should not give a relief to the respondent which relief was not given to him by the Trial Court and which relief he has not himself sought by either cross-appealing or cross-objecting. It only says that the Tribunal is not obliged to rest its decision on the grounds urged by the appellant. It recognises the principle that the judgment of the lower Court may be supported on any ground even though it is not raised in the memo of appeal. That, however, does not permit the Tribunal to urge any other ground which would work adversely to the appellant. This principle is enshrined in Rule 22 of Order XLI of the Civil Procedure Code.
38. In the instant case, the ultimate result of CIT(A) 's order is in favour of the assessee. The department being aggrieved by the CIT(A)'s order is in appeal before the Tribunal. Hence, though the assessee is not in appeal before the Tribunal, or has not filed any cross objection, it can support the ultimate decision of the CIT(A) on any ground decided against the assessee. The only point to be noted is that the appellant (revenue, in this case) should not be worse off by filing an appeal before the Tribunal. It won't be the case here. By the order of the CIT(A) , department has not been able to collect any additional tax from the assessee. However, by deciding any of the issues on merits, department may be able to collect some additional tax from the assessee. Therefore, if some of the issues are decided in favour of the assessee, department will not be worse off.
39. However, one argument may be raised by the department on account of the retrospective amendment to Section 143(1A) by the legislature. It may be argued that on account of the retrospective amendment, department would have been able to collect some additional tax despite CIT(A)'s order, and now by permitting the assessee to take recourse to Rule 27, it may be able to collect either lesser or nil additional tax from the assessee.
40. In our view, the argument is quite specious. We may assume a situation where there was an explicit provision to levy additional tax even in loss cases. Despite such a provision, if the CIT(A) decided, for whatever reason, in favour of the assessee that no additional tax is payable on account of loss, then, under such circumstances, would it not have been possible for the assessee to invoke Rule 27 for grounds decided against him? In our opinion, it would have been possible to do so because of the principle laid down in Rule 27. In that case, department would not have had the argument of retrospective. Hence, intervention by the legislature midway, enacting retrospective legislation, does not in any way affect the right of the respondent under Rule 27. Therefore, in the present case, we have no hesitation in permitting to invoke the provisions of Rule 27. We do so. Having permitted to do so, we/how proceed to deal with the adjustments made by the A.O under Section 143(1)(a) in each year and which are sustained by the CIT(A).
41. Asstt. year 1989-90 :
As mentioned in the earlier part of this order, five adjustments have been made by the A.O in this year. Out of the five, those at Sr. Nos. 4 and 5 have been held to be not in the nature of prima facie adjustments by the CIT(A). Against this, department is not in appeal. Hence, so far as these adjustments are concerned, the A.O shall amend the intimation under Section 143(1)(a) as directed by the CIT(A). These pertain to disallowance of ESIS payments under Section 43B amounting to Rs 2,552/- and of entertainment expenses amounting to Rs. 2,17,837/-.
42. Adjustments mentioned at Sr. Nos. 2 and 3 pertain to disallowance of Rs 74,230/- under Rule 6D of the I.T. Rules and Rs 1,000/- being payment to Diners Club. These have not been dealt with by the CIT(A) . Accordingly, we restore this matter to the file of the CIT(A) with a direction to deal with these adjustments in accordance with law.
43. The only adjustment decided against the assessee which requires our adjudication is the one relating to disallowance of investment allowance amounting to Rs 2,31,49,567/-. A.O disallowed the claim of the assessee on the ground that required reserve was not created by the assessee and CIT(A) confirmed the same on the same ground.
44. Mr. Irani has relied on Board Circular No. 305 dt. 12-6-1981 read with circular No. 259 dated 11-7-1979.
45. We have duly considered the matter. Circular No. 259, in substance, states that the condition as regards creation of reserve will stand satisfied if the sum total of the reserve created either in the year of installation or use or in the subsequent year or years is equal to the requisite amount of 75% of the actual allowance of Development Rebate in any year or years. Circular No, 259 is, no doubt, with reference to development rebate. However, circular No. 305 is with reference to investment allowance wherein the Board has directed the concerned authorities to follow the contents of circular No. 259. Circular No. 259 has been held to be binding by Gujarat High Court in the case of Bharat Vijay Mills Ltd. (154 ITR 786) and by Patna High Court in the case of Tata Robins Frazer Ltd (163 ITR 886). In the latter case it was held that if in a year, total income is a loss, statutory reserve need not be created, statutory reserve not having been created, development rebate will not be allowed, but the rebate to be actually allowed in future will be calculated and carried forward to the next assessment year. In the former case, Gujarat High Court issued a writ of Mandamus to follow the above circular of the Board directing the authorities to condone genuine deficiency in creating the reserve subject to the same being made good by the assessee by creating additional reserve in the succeeding assessment year. In the instant case, it cannot be denied that there was a genuine deficiency in creating the reserve as assessee had incurred heavy losses. In any case, not only was there a genuine deficiency, but the foregoing discussion would unequivocally suggest that mere non-creation of adequate reserve would not call for a prima facie adjustment as envisaged in Section 143(1)(a). The A.O was not only bound to follow the circular of the Board but was also supposed to give opportunity to the assessee to create additional reserve in subsequent years. Thus, the adjustment made by the A.O of Rs. 2,31,49,567/- was not in accordance with the provisions of Section 143(1)(a) and also not in conformity with the decision of the Bombay High Court in the case of Khatau Junkar Ltd (196 ITR 55). Accordingly, we delete the disallowance.
46. Asstt. year 1990-91 :
In this year also, as mentioned earlier, five adjustments were made by the A.O under Section 143(1)(a). Out of the five adjustments, four adjustments aggregating to 8s 45,399/-pertain to disallowance of unpaid sales-tax under Section 43B. This disallowance has been deleted by the CIT(A) and hence, A.O shall follow the directions of the CIT(A).
47. Major disallowance which the CIT(A) has confirmed is of Rs 73,56,473/- made in respect of unpaid interest on loans from financial institutions under Section 43B. A.O has disallowed the amount on the ground of it remaining unpaid. However, from the order of the CIT(A) it appears that accrued interest had been converted into term loan by the financial institution. Since there was no evidence as regards such conversion, CIT(A) confirmed the disallowance.
48. Mr. Irani contends that the issue requires examination of the terms of loan. For this, he has relied on the decision of the Cochin Bench of the Tribunal in the case of Sitaram Textiles Ltd. in 57 ITD 439. Mr. Tiwari has relied on the order of the CIT(A).
49. On a careful consideration of the matter, we feel that A.O should not have disallowed the interest under Section 143(1)(a) of the Act. Irrespective of the fact whether interest was converted into term loan or not, A.O was bound to enquire as to whether the interest was payable by the assessee in accordance with the terms and conditions of the agreement governing such loan. This is not only the requirement of clause (d) of Section 43B, but otherwise also, it is necessary to go into the terms of agreement to ascertain exactly the reason for the interest remaining unpaid. Such liabilities do not become prima facie inadmissible merely because they are reflected on the liability side of the balance-sheet. Therefore, it was imperative on the part of the A.O to have enquired into the matter instead of treating it as prima facie inadmissible. We delete the disallowance.
50. The issue relating to the allowance of depreciation was argued by Mr. Irani at the time of the hearing. However, we do not deal with the same as it does not arise out of the order of the CIT(A).
51. In the result, both the appeals of the department are partly allowed for statistical purposes.
52. I have perused the order of my learned brother. I remain unable to pursuade myself to agree with that order.
53. The revenue is in appeal before us, only on the ground that CIT(a) failed to appreciate that the Additional Tax under Section 143(1A) is leviable if there is variation between returned income/loss and income/loss finally determined on processing the return under Section 143(1) (a) and therefore he was wrong in holding that additional tax is not leviable where returned loss is reduced by making the prima facie adjustment. The grounds of appeal which is common to both the appeals have been re-produced in my learned brother's order, therefore need not be reproduced again. Thus, the subject matter of appeal before us is in regard to levy of additional income-tax under Section 143(1A) in the case where returned loss is reduced as per processing made by AO under the provisions of Section 143(1) (a).
54. The grounds of appeal filed by the assessee before CIT(a) have bean mentioned/repreduced in the order of CIT (a). For the sake of convenience the same are re-produced below:
Assessment Year 1989-90:
a) Deputy Commissioner of Income-tax has erred in rejecting application under Section 154 of the act which though prime-fade are mistake apparent on records and are covered under the provisions of Section 154 of the act.
b) Deputy Commissioner of Income-tax erred in levying additional tax under the provisions of Section 143(1) (a) of the act though the assessed loss has been determined at Rs. 8,42, 09, 358/-.
c) Deputy Commissioner of Income-tax has erred in considering the claim of Investment allowance in the returned total loss though it was clearly stated in the computation of total income that the Investment Allowance has been claimed for determination purpose."
Assessment Year 1990-91 "a) The Deputy Commissioner of Income-tax has erred in rejecting application under Section 154 of the act which though prima-facie are mistake apparent on records are covered under the provisions of section of the act.
b) The Deputy Commissioner of Income-tax has erred in levying additional tax under the provisions of Section 143(1) (a) of the act though the assessed loss has been determined at Rs. 5,75, 19,973/-.
c) The Deputy Commissioner of Income-tax has erred in levying additional tax on the Arithmetical error made in the computation of total income."
On these grounds of appeal the CIT (a) decided the appeal in favour of assessee on Ground No. 2 (common to both the appeals) and deleted the levy of additional income-tax being of the view that it cannot be levied in the case where returned loss is only reduced on processing of return. However, the CIT (a) has also given his findings on merits in regard to certain adjustments made/which were agitated before him. It appears that some of the adjustments were not agitated in appeal before CIT(a) and also that some concessions were made in respect of certain adjustments. For example, disallowance made under Rule 6D of Rs. 74, 230/- and Rs. 1,000/- being payment made to Diner Club for Assessment Year 1989-90. Similarly for that year, it is observed by CIT(a) as follows:
"...However, the main adjustment made for the assessment year 1989-90 relating to the disallowance of investment allowance amounting to Rs. 2, 31, 49, 567/- in order, as admittedly the assessee was not entitled to this deduction for the assessment year 1989-90. The assesses had not created the requisite reserve and could not have bean allowed deduction in investment allowance for the assessment year 1989-90." (emphasis supplied)
55. It is observed that prior to decision of CIT (a), the assessment for Assessment Year 1989-90 was completed by AO under the provisions of Section 143(3) vide his order dated 13-11-1991. The result of that assessment might have been in the mind of assesses while agitating the adjustments made in respect of certain items and also making concession in respect of investment allowance.
56. Similarly for Assessment Year 1990-91 no dispute was raised by assessee in regard to adjustment of Rs. 55, 93,994/- as there was admitted arithmetical mistake as in place of reducing the loss in respect of these disallowable items the assessee had increased the loss returned. So the concession was made in this regard by the assessee before CIT(A).
57. Keeping in view the submissions of the assessee on merits the CIT(a) held as follows :
Assessment Year 1989-90:
Disallowance in regard to investment allowance of Rs. 2, 31,49, 567/- was held to be correctly disallowed and adjustment in regard to entertainment expenses of Rs. 2, 17,8 37/-and disallowance in respect of 43-B ESI Rs. 2552/- ware held not to be of character of prima facie adjustment. Therefore addition in respect of investment allowance was maintained but adjustment in respect of entertainment expenses and disallowance of 43-B deleted. As mentioned above, the disallowances in respect of Rs. 74, 230/- made under Rule 6D and Rs. 1000/- being payment made to Diner Club was not agitated before CIT(a) .
Assessment Year 1990-91:
As mentioned above, the disallowance made in respect of disallowable items amounting to Rs. 55,93,994/- was not contested in appeal before CIT (a) and in regard to other disallowance of Rs. 74, 03,877/- the assessee raised two arguments. The main argument was in regard to unpaid interest on loans from Public Financial Institutions amounting to Rs. 73, 56,47 3/-. In this respect the CIT (a) observed that it was in the nature of prima facie adjustment in as much as the return was not accompanied by any evidence that the interest due was converted by Financial Institutions as term loans. In respect of another factors which are 4 items relating to taxes etc. amounting to Rs. 45, 399/- it was held that these being outstanding sales tax could not be categorised as prima facie adjustment.
58. On these findings of CIT(a), the assessee did not come into appeal. Upon filing the appeal by the revenue the assesses also did not prefer to file cross objections. In these circumstances it can be said that the assessee was quite content with the decisions given by the Commissioner as he did not choose to prefer an appeal and upon receipt of memo of appeal from revenue, he did not prefer to file any cross objections. Now the assessee is only in the capacity of respondent before us.
59. Before us, the learned Departmental Representative contended that in view of the amendment made in statute by Finance Act, 1991 with retrospective affect from 1-4-1989, the law has been made clear that additional Income-tax is leviable even where the loss declared is reduced or converted into income. Thus, the learned Departmental Representative's argument is that the order of CIT(A) deleting the additional tax be reversed being against the provisions of law as in force for the relevant period.
60. On the other hand, Shri F.V. Irani, the learned counsel appearing on behalf of assessee did not controvert the above arguments of learned DR. However, he contended that the adjustments made were wrong as these were not adjustments fit to be made under the provisions of Section 143(1) (a). When pointed out by us that the assessee was merely a respondent and no cross appeal or cross objection had been filed, how could this argument be accepted in the appeal of the revenue, he in this behalf contended that he could support the appellants order by any ground decided against him. Hence the reference of Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 (for short "Rule 27") came into consideration. Thereafter, he argued regarding the merits in regard to various prime facie adjustments made in respect of both the assessment years.
61. Now as regards the appeal of the revenue, there remains no dispute that in view of the amendment referred to above by the learned Departmental presentative, the additional tax has wrongly been deleted by CIT (a). Therefore, the order of CIT(a) in this regard has to be reversed and it is to be held that even there being assessed loss, the additional Income-tax in regard to difference of loss declared in the return and reduced in respect of prima facie adjustment held to be Justified has rightly been levied by the AO. Now coming to the arguments advanced by the learned counsel of the assessee regarding applicability of Rule 27, the Rule 27 for the sake of convenience is reproduced below:
"Respondent may support order on grounds decided against him 27.
The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him."
The rule permits the respondent to support the impugned order not only on the basis of ground allowed by the lower authority but also on the basis of ground decided against by the lower authority. In either case it must be a ground which was taken before the lower authority. A ground never taken before lower authority would not fall within the 4 corners of Rule 27. Now in the instant case, the assessee (respondent) objected to the additional tax on the ground that in the return of Income investment allowance had been claimed for determination purpose only and therefore such adjustment should not result into levy of additional tax. At no stags the assessee challenged the Jurisdiction of Assessing Officer before the CIT(a) and argued that the adjustments made by the AO was outside the scope of provisions of Section 143(1) (a). Thus it constitutes an entirely new ground taken by the assessee before the Tribunal and therefore it does not fall within the purview of Rule 27.
62. Even if for arguments sake it is considered that a new ground may be taken by respondent for the first time before the Tribunal, the fundamental principle is that such new ground should not be prejudicial to the appellant. The cardinal principle is that an appellant cannot be made worse off than before on account of having made the appeal in this case, the ground urged before us by the learned counsel for the assessee is that it was open to the assessee to create a reserve for investment allowance in any of the subsequent assessment years. Acceptance of this argument amounts to a finding that reserve created by the assessee or which the assessee may now create in relation to subsequent assessment would meet the requirement of Section 32A. This in my humble opinion amounts to grant of relief or advantage to the assessee far in excess of the relief originally allowed by the CIT(a). It should also be born in mind that the assessee had admitted before the learned CIT(a) that he was not entitled to investment allowance. It also appears that it has never been the case of the assessee that he created reserve during any subsequent period.
63. In view of the discussion in above paragraphs, I hold that the learned AD rightly levied the additional Income-tax in respect of adjustment of Rs. 2,31,49,567/- made by him. I therefore reverse the order of CIT (a) and restore that of AO to this extent. In respect of other adjustments as well as for Assessment Year 1990-91 I agree with the view taken by my learned brother.
64. In the result both the appeals filed by the revenue are partly allowed for statistical purpose.