Delhi High Court
Samtel Color Limited vs Union Of India (Uoi) And Ors. on 19 August, 2002
Equivalent citations: 99(2002)DLT764
Author: D.K. Jain
Bench: D.K. Jain, Sharda Aggarwal
JUDGMENT D.K. Jain, J.
1. Since a common question of law is involved, both the cases are being disposed of by this judgment.
2. The intimation letters sent to the petitioners, hereinafter referred to as the assessed, under Section 143(1)(a) of the Income-tax Act, 1961 (for short 'the Act'), after making certain adjustments to the total income returned by them and demanding additional tax under Section 143(1A) of the Act, are under challenge in these writ petitions.
3. In order to appreciate the issue involved and the rival contentions, we shall briefly refer to the facts of each of the cases.
4. In CWP 2087/91, the assessed, engaged in the business of manufacture, sale and export of colour picture tubes, filed its return of income for the previous year ending 31 March 1990, relevant to the assessment year 1990-91, on 28 December 1990, declaring a loss of Rs. 21,16,08,308/-. The return was accompanied by tax audit report, audited balance sheet, profit and loss account and some other documents. While arriving at the said loss the assessed suo motu offered certain expenses for disallowance in accordance with the provisions of the Act. However, out of the expenses booked under various heads, entertainment and presents, the assessed claimed respectively Rs. 1,14,933/- and Rs. 65,818/- as allowable expenditure. In the annexures to the return, it was also stated that during the relevant previous year the assessed had exported 54,923 picture tubes and duty draw back on the said picture tubes was accounted for in the profit and loss account at Rs. 700/- per picture tube. However, by the end of the previous year, duty draw back was sanctioned only for exported of 25,000 tubes and for the balance picture tubes, assessed's application for brand rate fixation was pending with the concerned authorities and, therefore, un-sanctioned claim was not treated as income for the relevant assessment year.
Not accepting the stand of the assessed and holding all the aforesaid three items as inadmissible/includible in the total income, the Assessing Authority whittled down the returned loss of Rs. 21,16,08,308/- to Rs. 19,04,81,443/- and sent to the assessed the impugned intimation dated 27 March 1991 along with an adjustment explanatory statement. Thus adding back a total sum of Rs. 2,11,26,851/-, the Assessing Officer proceeded to levy an additional tax, amounting to Rs. 22,81,700/- under Section 143(1A) of the Act.
5. In CWP 2895/95, the assessed, engaged in the business of manufacture and sale of portable gensets, filed its return of income for the previous year ending 31 March 1992, relevant to the assessment year 1992-93, on 30 December 1992, declaring income at nil. In the computation of total income, forming part of the return, net profit as per profit & loss account, amounting to Rs. 2,77,41,947/- was enhanced to Rs. 5,33,05,555/- by adding depreciation, miscellaneous expenditure, entertainment expenditure and loss on sale of fixed assets. From the said profit of Rs. 5,33,05,555/-, an amount of Rs. 78,54,965/- being sales promotion assistance received from M/s. Honda Motor Co. Ltd., Japan was reduced on the plea that it was a capital receipt. Thus, the profit was reduced to Rs. 4,54,50,950/-. After claiming certain statutory allowances/disallowances, the Commercial profits were arrived at Rs. 4,86,00,563/-, against which the assessed claimed deduction under Section 80-I of Rs. 1,21,50,141/-, being 25% of commercial profits, viz. without deducting depreciation for the current year. From the resultant figure, depreciation of Rs. 2,84,25,907/- was reduced was taxable business income was arrived at Rs. 8,24,515/-. Setting off this income against the brought forward losses of earlier years, nil income was returned.
Treating the sales promotion assistance as the revenue receipt and disallowing the relief, as computed, under Section 80-I of the Act, the Assessing Officer made adjustments of Rs. 2,00,05,106/-. Although the total income was computed at nil because of set off of brought forward losses but on account of the said adjustment additional tax amounting to Rs. 20,70,528/- was charged vide the impugned intimation dated 30 July 1993. Against the said intimation, the assessed filed an application under Section 154 of the Act for rectification on the plea that both the adjustments were beyond the scope of Section 143(1)(a) of the Act read with first proviso thereto. The application was, however, rejected vide order dated 28 December 1993. Aggrieved, the assessed preferred a revision petition to the Commissioner of Income-tax under Section 264 of the Act, but without any success.
6. The impugned intimations are challenged on various grounds. It is urged that: (i) since the word "adjustment" is qualified by the phrase "prima facie" only such adjustments can be made under Section 143(1)(a) of the Act on which no two views are possible; (ii) the disputed claims cannot be equated with prima facie inadmissible claims; (iii) the adjustment of taxability of receipt/source of income is outside the scope of prima facie adjustments; (iv) the adjustments can be made only on the basis of material on record; and (v) the correctness of the return has to be tested in the light of the law prevailing at the time of filing of the return and not with reference to the events subsequent thereto.
7. A bare reading of Section 143(1)(a) of the Act, make it clear that if, on the basis of the return filed by the assessed, any tax or interest is found due after adjustments, as set out in the Section, an intimation has to be sent to the assessed specifying the sum so payable. Similarly, if any refund is found due to the assessed on the basis of the said return, it shall be granted. However, the first proviso to the section authorises the Assessing Officer to make certain adjustments while calculating the tax or interest payable or while granting refund. The adjustments permitted to be made are also specified under the proviso. In the present case, we are concerned with Clause (iii) of the first proviso. Relevant part of Section 143(1)(a) of the Act with first proviso thereto is set down below:
" 143. (1)(a) Where a return has been made under Section 139, or in response to a notice under Sub-section (1) of Section 142:-
(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provision of Sub-section (2), an intimation shall be sent to the assessed 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 assessed:
Provided that in computing the tax or interest payable by, or refundable to, the assessed, the following adjustments shall be made in the income or loss declared in the returned, 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.
(Emphasis provided)
8. Since there is no controversy with regard to the interpretation of Sub-section (1A) of Section 143 of the Act, we shall make a passing reference to the provision. It provides that where after making the adjustment under Section 143(1)(a) it is found that the total income so determined exceeds the income declared in the return by any amount, the Assessing Officer shall further increase the income tax payable by additional income tax calculated @ 20% of the tax payable on such excess amount. The additional income tax so calculated has to be specified in the intimation (notice of demand) to be sent under Section 143(1)(a) of the Act.
9. Reverting back to the main dispute, on a plain reading of Clause (iii) to the first proviso, reproduced above, it is clear that unless the return or the accompanying documents or accounts show that the deduction, allowance or relief claimed therein in prima facie inadmissible on the basis of information available in the said documents, such deduction or allowance claimed cannot be disallowed. It is also evident that only those adjustments can be made under the said clause which on the basis of return and documents accompanying it (emphasis provided are "prima facie" in admissible.
10. Therefore, the first and the foremost question which arises for consideration is as to what the phrase "prima facie", used in Clause (iii) to the first proviso means.
11. The phrase "prima facie" is not defined in the Act. In common parlance the phrase "prima facie" means 'on the face of it'. According to Black's Law Dictionary (6th Edition), the phrase "prima facie" means : "At first sight; on the first appearance; on the face of it; so far as can be judged from the first disclosure;....."
12. Thus, going by the literal and dictionary meaning of the phrase "prima facie", for the purposes of adjustments under Clause (iii) to the proviso, a deduction claimed must be inadmissible on the face of the return, documents and accounts accompanying it. If the deduction or allowance on relief so claimed is capable of a debate or requires further proof in connection therewith, an adjustment in respect thereof cannot be made under Clause (iii) of proviso to Section 143(1)(a) of the Act.
13. Support to this interpretation is lent by a circular issued by the Central Board of Direct Taxes, bearing No. 549 dated 31 October 1989 (reported in [1991[ 82 ITR St.1 at page 20). The circular throws considerable light in understanding and appreciating the intention behind introduction of the said provision. While explaining the scope of adjustments to be made in the income or loss declared in the return under the proviso to Clause (a) to Sub-section (1), in paragraph 5.4 it is stated thus:
"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 assessed."
Some twelve examples of such prima facie admissibles or inadmissibles in respect of which adjustments can be made to the returned income or loss of various deductions are given in the circular to illustrate the scope of adjustments.
14. It is not necessary to reproduce here the long list of the instances given in the circular. However, perusal of these makes one thing sufficiently clear that only such adjustments in respect of deductions/allowances can be made under Section 143(1)(a) of the Act, which are claimed either less or excessive and are ex-facie not allowable on a plain reading of the relevant Section, without there being any scope for doubt or debate.
15. While dealing with the said provision of law in S.R.F. Charitable Trust v. Union of India and Ors. (1992) 193 ITR 95, a Division Bench of this court had said that in a way Clause (iii) of the first proviso to Section 143(1)(a) is analogous to Section 154 of the Act. It was also observed that where it is evident from the return as filed along with the documents in support thereof that the claim of the assessed is inadmissible only then an adjustment under the said proviso can be made. As an illustration, it was pointed out that if in a case proof in support of the claim was not furnished by an assessed, then for the lack of proof, no disallowance or adjustment could be made under the said provision and the only option left to the Assessing Officer in such a case was to require the assessed to furnish proof by issuing a notice under Section 143(2) of the Act.
16. At this stage it is also pertinent to mention that in another circular (No. 581 dated 28.9.90, reported in (1991) 86 ITR St. 2) issued by the Central Board of Direct Taxes, it has been stated that the scope of the powers to make prima facie adjustments under Section 143(1)(a) is "somewhat co-terminus with the power to rectify a mistake apparent from the record under Section 154 of the Act." It is trite that circulars issued by the Board under the provisions of Section 119 of the Act are binding on the Revenue (See: UCO Bank v. Commissioner of Income-tax and Commissioner of Income-tax v. Anjum M.H. Ghaswala and Ors. .
17. In the context of the aforenoted circular and the dictum in SRF Charitable Trust case (supra) holding that Clause (iii) of the first proviso to Section 143(1)(a) of the Act is analogous to Section 154 of the Act, it would be appropriate to notice the scope of Section 154 as well. The Section provides for rectification of "mistake apparent from the record". While interpreting the scope of the said Section, the Supreme Court in In T.S. Balaram, Income-Tax Officer, Company Circle IV, Bombay v. Volkart Brothers and Ors. (1971) 82 ITR 50 held that a mistake apparent on the record within the meaning of Section 154 of the Act must be an "obvious" and "patent" mistake and not something which can be established by a long drawn process of reasoning of points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record. In Hotz Hotels Pvt. Ltd. v. Commissioner Income-tax (2001) 248 ITR 647 , a Division Bench of this Court, to which one of us (D.K. Jain, J.) was a party observed thus:
"In order to attract the application of Section 154, the mistake must exist and the same must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. "Mistake" means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error; a fault, a misunderstanding, a misconception. "Apparent" means visible; capable of being seen, obvious; plain. It means "open to view, visible, evident, appears, appearing as real and true, conspicuous, manifest, obvious, seeming." A mistake which can be rectified under Section 154 is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration."
In Master Construction Co.(P) Ltd. v. The State of Orissa and Anr. (1966) 17 STC 360, the Supreme Court dilated on the term "an error apparent from record" to be one which is not an error which depends for its discovery on elaborate arguments on questions of fact or law. A similar view has been expressed by the Apex Court in a recent decision in Commissioner of Income-tax v. Hero Cycles Pvt. Ltd. and Ors. (1997) 228 ITR 463 wherein it is again said that for invoking jurisdiction under Section 154 of the Act, for exercising power of rectification of mistake, it is a condition precedent that the mistake must be "glaring and obvious."
18. We are, therefore, of the considered opinion that under Section 143(1)(a) of the Act it is not open to the Assessing Officer to make any adjustment in the returned income by disallowing any claim for deduction, allowance or relief, unless he is satisfied on the basis of information available in the return, documents, and the accounts accompanying it that such a claim is inadmissible on the face of it and there is no possibility of any debate thereon on such claim etc. If anything more is read into the power of the Assessing Officer to make unilateral adjustments, it would render the provision wholly arbitrary and unreasonable because: (a) a disallowance is made without giving an opportunity to the assessed to explain his view point in support of the deduction or allowance and (b) additional tax on the increased amount is charged from him arbitrarily. This would not only be in total violation of the principles of natural justice, it will also be not in consonance with the spirit of the provision to cause minimum inconvenience to the assessed and at the same time put the assessed on guard against claiming inadmissible deductions and allowances. On the contrary, the above interpretation of Section 143(1)(a) of the Act will not cause any prejudice to the Revenue. In a given case where the Assessing Officer has any doubt about the allowability of deduction or claim made by the assessed, it is open to him to issue a notice under Sub-section (2) of Section 143 and have the evidence in support thereof. Similar views have been expressed on the subject by the Bombay High Court in Khatau Junkar Ltd. and Anr. v. K.S. Pathania and Anr. (1992) 196 2nd 55, Calcutta High Court in Modern Fibotex India Ltd. and Anr. v. Deputy Commissioner of Income-tax and Ors. (1995) 212 ITR 496; Karnataka High Court in God Granites v. Under Secretary, Central Board of Direct Taxes and Ors. (1996) 218 ITR 298 and some other High Courts as well.
19. The next question raised for consideration is to the law prevailing at a particular time - whether the time when the return was filed on when the Assessing Officer makes the adjustments - would be relevant for judging whether the deduction, allowance or relief claimed by the assessed in the return of income was correct or not ?. Alternatively put, whether the question of correctness of the return is to be considered in the light of the law prevailing at the time of filing of the return or at the time of adjustment by the Assessing Officer.
20. In Modern Fibotex case (supra) the Calcutta High Court, when called upon to consider a similar question, held that the power of the Assessing Officer under Section 143(1)(a) of the Act was to determine the correctness of the return in the light of the law prevailing at the time when the return was filed. It was observed:
"Without going into the question as to whether the provisions are penal in nature, but keeping in mind the consequences of an adjustment made and the insistence upon the assessed filing a correct return, it would follow that the date for judging the question of adjustment must be the actual date of the return in the light of the law then prevailing. To hold otherwise, manifestly shocks one's sense of justice that an act, correct at the time of doing it, should become incorrect by some new enactment"
Clarifying further with reference to the amendment in law involved in that case the Court said:
"Additionally, the change in the law by amendment of Section 28 took place several months after the return was filed by the assessed. This Court is not determining the validity of the amendment of Section 28, but is merely determining the scope of the power under Section 143(1)(a). The assessed's return could have been taken up by the Assessing Officer under Section 143 prior to the amendment. In that event, no adjustment would have been made and no intimation would have been sent. An assessed's liability cannot be made to depend upon such a fortuitous circumstance."
21. The view expressed in Modern Fibotex (supra) was upheld by the Supreme Court in Commissioner of Income-tax v. Hindustan Electrographites Limited (2002) 243 ITR 48.
22. It is, however, submitted by Ms. Bansal, learned counsel for the respondents, that correctness of the decision in Hindustan Electrophites' case (supra) has since been doubted by the Supreme Court in Assistant Commissioner of Income-tax v. J.K. Synthetics Ltd. (2001) 251 ITR 200. Having carefully gone through the two judgments, we are of the view that in J.K. Synthetics case (supra) the Court has expressed reservation about the correctness of the judgment in Hindustan Electrographites case (supra) only to the extent it pertains to the interpretation of Sub-section (1A) of Section 143 of the Act. As noted above, we have no controversy in hand insofar as the said provision is concerned.
23. Relying on Jiyajeerao Cotton Mills Limited v. Income-tax Officer, "C" Ward, Companies District-I, calcutta and Ors. [1981] 130 ITR 710 & Mysore Cements Limited v. Deputy Commissioner of Commercial Taxes (Assessment-V), City Division-II, Bangalore (1994) 93 STC 464), it is submitted by learned counsel for the Revenue that since the Supreme Court only declares the law, the question of adjustment has to be adjudged by applying the law prevailing at the time of making such adjustment. We are not convinced with the submission. An assessed is not, in fairness, supposed to know as to what interpretation is going to be finally placed by the Apex Court on a particular provision of law.
24. We have, therefore, no hesitation in holding that the question of prima facie adjustment under Section 143(1)(a) of the Act has to be considered with reference to the date on which the return of income is filed and not with reference to the events subsequent thereto.
25. It was vehemently submitted by learned counsel for the Revenue that in the present cases a close look at the returns and the accompanying documents would show that all the adjustments made by the Assessing Officers were prima facie inadmissible as there was no controversy with regard to their disallowance and that the Assessing Officers could, without any thing more, justifiably act within their jurisdiction to make the adjustments in the income returned, we are unable to persuade ourselves to agree fully with learned counsel for the Revenue.
26. Reverting first to the facts in CWP 2087/91, the first claim which has been disallowed by the Assessing Officer in this case is in respect of the presentation articles of the value of Rs. 65,818/- under Rule 68 of the Income-tax Rules 1962. The said rule provides that allowance of expenditure on advertisement in respect of the articles intended for presentation shall not exceed Rs. 50/- per article. In its return, the assessed had stated that though the tax audit report mentions Rs. 65,818/- as expenditure on articles presented in excess of Rs. 50/- per article but the same is not to be disallowed as no advertisement, as envisaged in the press note issued by the Ministry of Finance, had taken place as the article did not bear either the logo or the name of the company and, therefore, the articles were not meant for advertisement. In the adjustment explanatory sheet, except for noting down the said provision, there is no indication why the aforesaid note in the return has been ignored by the Assessing Officer. In our view this was clearly an arguable point, particularly in view of various judgments available on the subject.
27. The next disallowance is 1/3 of the amount out of the entertainment expenses, which, according to the assessed, could not be considered as entertainment being expenditure incurred on companies' officials. The mere fact that a similar issue travelled up to the Punjab & Haryana High Court in a reference in Commissioner of Income-tax v. Haryana Financial Corporation (1989) 180 ITR 18, relied upon by learned counsel for the Revenue, shows that the issue, whether directors act as employees of a company, was not free from doubt.
28. The third and the last adjustment made by the Assessing Officer was by the addition on account of the claim of duty draw back preferred but not approved by the authorities concerned during the previous year. In the annexure to the refund the assessed had stated that though they had made a claim for duty draw back on export of 29923 picture tubes but the same was pending approval as on the last date of the previous year and, therefore, the entire claim could not constitute taxable income for the relevant previous year. Only that part of the claim had been included in the total income, which had been sanctioned by the Government. It was submitted by learned counsel for the assessed that till the claim of the petitioner was approved by the Central Government, it could not be said that there was any existing right in favor of the petitioner to receive the amount of Rs. 2,09,46,100/-, claimed as duty draw back, creating a debt in favor of the petitioner. It is asserted that since the assessed had not acquired any right to receive the said amount, the same could not be included in its total income on accrual basis. Without going into the merit of the assessed's stand at this juncture, we are of the view that the stand of the assessed could not be said to be ex facie un-sustainable. It required deeper consideration before the amount claimed as duty draw back in the books of accounts of the assessed could be added as the revenue receipt for the relevant previous year. The adjustment on this account was also clearly beyond the scope of Section 143(1)(a) of the Act.
29. In our considered opinion, the inadmissibility of the deduction/disallowance of all the three subject claims in this case was not so clear and self-evident from the return or accompanying documents that the Assessing Officer could have taken recourse to the adjustment under Section 143(1)(a) by making the disallowance. May be that ultimately the petitioner is not found entitled to the claims/allowances in question but that would not mean that recourse could be had by the Assessing officer to disallow the same under the said Section, denying an opportunity to the assessed to challenge his decision.
30. Now coming to the facts in CWP 2895/95, as noticed above, the two adjustments, namely, the sales promotion assistance received by the assessed from their foreign partners (Rs. 78,54,965/-), claimed by the assessed to be a capital receipt, has been treated as revenue receipt and the relief claimed under Section 80I of the Act (Rs. 1,21,50,141/-) against the commercial profits, without taking into consideration depreciation for the current year, has been disallowed.
31. Asserting that there was no impropriety on the part of the assessed in making both the aforenoted claims at the time of filing of the return, Mr. Syali, learned Senior Counsel for the assessed, submits that insofar as the first claim is concerned, at the time when the return was filed, assessed's similar claim in respect of assessment year 1989-90 had been accepted by the Assessing Officer in a regular assessment completed Under Section 143(3) of the Act and even notice by the Commissioner of Income-tax under Section 263 of the Act, seeking to set aside the assessment was received by the assessed on 22 September 1993 i.e. after the filing of the return. As regards the computation of relief under Section 80-I was concerned, it is contended that there was a conflict of views on the subject between various High Courts and certain decisions of the Income-tax Appellate Tribunal (for short the Tribunal) were in assessed's favor. It is thus, argued that though ultimately both the issues got settled against the assessed but on the date the return of income was filed, it could not be said that there was no debate on the issues.
32. Ms. Bansal, learned counsel for the Revenue, on the other hand, would urge that the stand of the assessed on the first issue having been rejected even by the Supreme Court in Commissioner of Income-tax v. Kotagiri Industrial Co-operative Tea Factory Ltd. and on the second issue, a decision of this court in Taylor Instruments Co. (India) Ltd. v. Commissioner of Income-tax (1992) 198 ITR 1 (Delhi) being available at the time of filing of return, both the claims were prima facie inadmissible and, therefore, the Assessing Officer was justified in making the impugned adjustments.
33. Testing the rival stands on the touchstone of the interpretation given by us to the legal provisions, particularly to the first proviso to Section 143(1)(a) of the Act, we are of the opinion that insofar as the claim of the assessed in treating the sales promotion assistance as capital receipt is concerned, in view of the fact that a similar claim in respect of earlier year had been accepted by the Assessing Officer in a regular assessment, it seems difficult to hold that it was prima facie inadmissible as on the date of filing of return for the relevant assessment year. Merely because later on the claim was sought to be withdrawn or the issue was finally decided by the Apex Court against the assessed after the filing of the return, it can not be held that as far as the assessed is concerned, the claim in the return was incorrect at the threshold.
However, as regards the basis adopted by the assessed in computing the relief under Section 80-I of the Act, we are of the view that qua the assesseds under the territorial jurisdiction of this Court, an authoritative pronouncement of this Court, dated 22 April 1992, in Taylor Instruments (Supra), inter alia, holding that in computing the profits and gains of a priority industry for relief under Section 80-I, depreciation for the current year has to be deducted, being available on the date of filing of return on 30 December 1992, the assessed can not be heard to say that since they were not aware of the pronouncement, no fault could be found with the return. Be that as it may, here the moot question arising is whether in the light of the said decision, could it be said that the claim of the assesseds under Section 80-I, as computed, was still not prima facie inadmissible? In our opinion the answer has to be in the negative. While making adjustment the Assessing Officer could not ignore the decision of the jurisdictional High Court, according to which assessed's computation, at the time of filing of the return, was not correct. We are, therefore, of the view that the adjustment on the second issue of relief under Section 80-I fell within the ambit of Section 143(1)(a) of the Act read with the first proviso thereto and the action of the Assessing Officer to that extent was valid in law.
34. For the foregoing reasons, writ petition No. 2087/91 succeeds in entirety but writ petition No. 2895/95 would succeed partly. The impugned intimations are quashed to the extent indicated above and the rule is made absolute accordingly. We have been informed that in both the cases regular assessments under Section 143(3) of the Act have also been completed for the relevant assessment years.
35. The petitioner in CWP 2087/91 will be entitled to costs, which are quantified at Rs. 5,000/-. However, in CWP No. 2895/95 there will be no order as to costs.