Income Tax Appellate Tribunal - Kolkata
Luxmi Tea Co. Ltd. vs Deputy Commissioner Of Income-Tax on 24 June, 1992
Equivalent citations: [1992]42ITD642(KOL)
JUDGMENT
ASSESSMENT--Regard for past records.
Ratio :
Assessing officer could not act in capricious manner while estimating income and should have had regard to parts records.
Held :
Even in a best judgment assessment under section 144, the assessing officer must have regard for the past record of the assessee. He cannot act in a capricious manner while estimating the income. Judging by the past record of the assessee, it is clear that the assessing officer was not justified in estimating the income at Rs. 60 lakhs for each of the assessment years. The assessments are set aside and the assessing officer is directed to reframe them in accordance with law.
Application :
Also to current assessment years.
Income Tax Act 1961 s.144 Previous Year--CHANGE--Withdrawal of permission.
Ratio:
It was improper to draw the conclusion that there was a reduction in the profits of the first year of change and the very motive in changing the accounting year was to evade tax withdrawal of permission was therefore not justified.
Held:
It is in the assessment order itself that the Income Tax Officer withdrew the consent earlier accorded to the change. The main thrust of the Income Tax Officer was that the assessee has attempted to evade tax by seeking to change its previous year. It would not be proper to jump at the conclusion that merely because there is a reduction in the profits of the first year of change, the very motive in changing the accounting year is to evade taxes.
Application:
Also to current assessment years.
Income Tax Act 1961 s.3 Previous Year--CHANGE--Conditions precedent.
Ratio & Held :
Condition of non-installation of plant and machinery during extended period unreasonable therefore assessing officer not to impose conditions as would curtail assessee's right to carry on business in manner he thinks fit.
Application:
Not to current assessment years.
Income Tax Act 1961 s.3 Previous Year--CHANGE--Conditions precedent.
Ratio:
Since the conditions for grant of change of previous year as to being maintaining of a specified profit were invalid and had to be struck off.
Held:
The following conditions (a) & (c) were put by the assessing officer while granting the change of previous year:
(a) The net profit as on 31-3-1983 in no circumstances should be less than for previous year ending on 31-12-1982 for these audited balance sheets and P & L A/c for year ending 31-12-1982 and 31-3-1983 would both have to be filed. (c) If net profit returned for year ending 31-3-1983 is less than Rs. 5 lakhs, the net profit as on 31-12-1982 shown then the receipts as well as expenses except the ones specifically denied above will be proportionately given based on figures for year ending 31-12-1982 disregarding whatever is the actual position for the extra three months that would be included in the changed previous year. These conditions are invalid and have to be struck off.
Application:
Also to current assessment years.
Income Tax Act 1961 s.3 ORDER R.V. Easwar, Judicial Member
1. These three appeals preferred by the assessee are directed against the order of the CIT(A) passed on 1-10-1991 for the assessment years 1983-84 to 1985-86. They involve connected issues and are, therefore, disposed of by a single order.
2. The assessee is a company growing tea. It adopted the calendar year as its accounting year up to and including the assessment year 1982-83. On 18-12-1982 it wrote a letter to the assessing officer which is as under:--
Re : Petition for change of Accounting year A/c. The Luxmi Tea Company Limited.
P.A. No. H-063-CV-8083
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CAL/C-II/(P) Dear Sir, With reference to above it is submitted that at present the accounting year of the Company ends on 31st day of December each.
It was resolved in our Board of Director's Meeting held on 20th December, 1982 "that the accounting year of the Company will be changed subject to the approval of Income-tax Officer.
It was further resolved that 1st April to 31st March be adopted as Accounting year of the Company instead of the calendar year.
We would like to mention here that most of the parties with whom we deal follow their year ending on such date. Our garden is situated in the Darrang District of Assam where season starts from April of the year, moreover their remains a large quantity of unsold teas at the end on 31st December. On view of such it is very difficult for us to estimate the value of unsold teas at the end of the year, so Cash Budget from the month of January cannot be prepared correctly which is very much essential for fixing our drawing limit by the Bank.
We therefore request you to kindly allow us necessary permission for change of the accounting year from calendar year to financial year, on obtaining such permission we shall close our books of accounts as on 31 st March, 1983 i.e., for the period of 15 months from 1-1-1982 to 31st March, 1983.
As the rate of taxation of company is uniform and there be no escapement of any assessment year there will no loss of Revenue if permission is granted by your goodself.
Yours faithfully, Sd--
S. Hustaphi Secretary On 30-12-1982 the Assessing Officer wrote to the assessee as under:--
Sub : Change of previous year from calendar year to financial year from the assessment year 1983-84.
Ref : Your letter dated 20-12-1982 Your request for change of previous year on the basis of your letter dated 20-12-1982 and Profit & Loss A/c for the year ending 31-12-1982 and 31-3-1983 as filed with me by Sri S. Mustaphi, Secretary of the company is hereby accorded subject to the following conditions:
(a) The Net profit as on 31-3 -1983 in no circumstances should be less than for previous year ending on 31-12-1982 for these audited balance sheets & P. & L. A/c for year ending 31-12-1982 & 31-3-1983 would both have to be filed.
(b) New Plant & Machineries will not be installed during the increased three months. Initial depreciation if arising within these extra three months from 1-1-1983 to 31-3-1983 will not be claimed by your company.
(c) If Net Profit returned for year ending 31-3-1983 is less than Rs. 5 lacs, the Net Profit as on 31-12-1982 shown then the receipts as well as expenses except the ones specifically denied above will be proportionately given based on figures for year ending 31-12-1982 disregarding whatever is the actual position for the extra three months that would be included in the changed previous year.
(d) Sudden unforeseen expenses, theft expenses not wholly foreseen in the forecast will be disallowed.
The case was discussed vide order sheet dated 28-12-1982 with Sri S. Mustaphi, Secretary of your company who has accepted the condition of which the change of previous year is subject to. In case of any objection please file a written submission. Till the disposal of such petition the change of previous year will remain in abeyance.
The change of previous year under Section 3(4) of the IT Act is subject to all other conditions that are inherent to the body of the said section.
The change of previous year hereby accorded will be withdrawn if the grounds stated are found to be wrong or if the change of previous year leads to evasion of tax. Subject to all the above condition the change of previous is hereby accorded.
Yours faithfully Sd/-
Illegible ITO, 'F-Ward, Dt. II/Cal.
It will thus be seen that the application of the assessee for change of its accounting year from the calendar year 1982 to 31-3-1983 (a period of 15 months) was granted by the Assessing Officer subject to certain conditions which are contained in his letter extracted above.
3. On 1-8-1983 the assessee filed its return of income declaring a total income of Rs. 64,656 for the assessment year 1983-84. The previous year was a period of 15 months from 1-1-1982 to 31-3-1983. While completing the assessment under Section 143(3) of the IT Act on 14-8-1985 the Assessing Officer did not accept the change of accounting year. The reasons for his refusal to recognise the change in the accounting year, notwithstanding that he had earlier granted the request for the change though subject to certain conditions, are contained in the opening portion of the assessment order for the assessment year 1983-84. In short, they are that the assessee did not comply with the conditions subject to which the change was granted though it had accepted the same and had agreed to abide by them. He noticed that the assessee had declared a total income of only Rs. 64,656 even though it was expressly stipulated in the order granting the change that the net profit should not be less than that for the 12 months ended 31-12-1982. From this fact he inferred that the assessee had attempted to evade tax by seeking to change its accounting year. He also noticed that the "proforma" profit and loss account for the 12 months ending 31-12-1982 filed during the proceedings in connection with the change in the accounting year showed a profit of Rs. 14,92,860. He also noticed that though the assessee's 'proforma' profit and loss account filed before him while the application for change was being considered showed that the effect of the change would be only a reduction of profit by Rs. 4,14,000 the audited profit and loss account showed a reduction of Rs. 12,09,691 in the profit by reason of the change in the accounting year. He, therefore, refused to allow the change on grounds of loss of revenue. He adopted 31-12-1982 as the accounting year of the assessee for the assessment year 1983-84 and determined the total income at Rs. 6, 19,950. For the assessment years 1984-85 and 1985-86 the Assessing Officer completed the assessments by adopting the accounting years as 31-12-1983 and 31-12-1984 respectively. They were completed exparte under Section 144 of the Act on the ground that the assessee did not comply with the requirement to furnish the figures of income and expenditure for the period ending 31-12-1983 and 31-12-1984 respectively in spite of repeated opportunities. The income was estimated at Rs. 60 lakhs for each of these two years.
4. The assessee appealed to the CIT(A) who passed separate orders, one for the assessment year 1983-84 and the other for the assessment years 1984-85 and 1985-86, on the same day. He was of the view that the assessee was not entitled to the change since it had not complied with the conditions subject to which it was granted. He also endorsed the conclusion of the Assessing Officer that the assessee was trying to evade tax by changing its previous year.
5. The case of the assessee before us in the further appeals, presented by Mr. N.K. Poddar, is that the Assessing Officer, having originally granted the change in the accounting year, cannot later resile and withdraw the permission. He submitted that though the Assessing Officer is free to impose reasonable conditions to protect the interests of the revenue while according permission to the assessee's request for a change in its accounting year, he cannot impose illegal conditions or conditions which are repugnant or contrary to the provisions of the Act or the Rules. He pointed out that the conditions laid down by the Assessing Officer were invalid and illegal, being contrary to the provisions of the Act. He further submitted that the Assessing Officer cannot impose an impossible condition that the net profit for the changed accounting year should under no circumstances be less than that for the old accounting year. Referring to the second condition, Mr. Poddar submitted that it is not open to the ITO to curtail the right of the assessee to install new plant and machinery if the exigencies of the business required it. He also pointed out that the ITO had imposed another untenable condition viz., that even "sudden" and 'unforeseen' expenses will not be allowed in the assessments. In support of his contentions, he referred to the following decisions:--
(i) J.K. Synthetics Ltd. v. O.S. Bqjpai, ITO [1976] 105 ITR 864 (All.)
(ii) CIT v. Sri Hari Prosad Lohia [19831 143 ITR 276 (Cal.)
(iii) Assam Frontier Tea Ltd. v. IAC [1987] 164 ITR 253 (Gauhati)
(iv) VXL India Ltd. v. ITO [1987] 168 ITR 805 (Guj.)
(v) ITO v. Harbanslal Malhotra & Sons Ltd. [1985] 14 ITD 328 (Cal.) Mr. Lahiri, the Learned Deptl. Representative, while generally supporting the orders of the departmental authorities, drew our attention to the first three grounds raised by the assessee questioning the orders of the CIT(A) on grounds of lack of opportunity and submitted that the entire issue, if thought fit, should be restored to the first appellate authority for a fresh disposal. On merits, he contended that the conditions imposed by the ITO were reasonable and for the protection of the revenue from loss and since the assessee had committed a breach of the same, the Assessing Officer was well within his powers in refusing to recognise the change while passing the assessment order.
6. We have carefully considered the rival submissions. We are of the opinion that the assessee is entitled to succeed in the appeal for the assessment year 1983-84. Section 3(4) of the IT Act gives the choice of adopting a particular year as the "previous year' for assessment purposes to the assessee. It goes on to say that the previous year, once adopted by the assessee, cannot be changed except with the consent of the ITO and upon such conditions as the ITO may think fit to impose. The ratio of the decision of the Supreme Court in Esthuri Aswathaiah v. CIT [1966] 60 ITR 411 is that the ITO, while imposing conditions, cannot go against the provisions of the Act. The Allahabad High Court in J.K. Synthetics Ltd.'s case (supra) held that the conditions imposed by the ITO cannot be contrary to the provisions of the Act and further that they should not be ambiguous or superfluous. If they are ambiguous or superfluous, they can be struck off even if the assessee had originally accepted them. The court recognised the need to protect the interests of revenue, but at the same time pointed out that the conditions should be reasonable and not opposed to the provisions of the Act. The Calcutta High Court in Sri Hari Prosad Lohia's case (supra), referring to the decision of the Allahabad High Court cited above, held that the conditions cannot be ambiguous or unreasonable. The decision of the Gujarat High Court in VXL India Ltd. 's case (supra) is also to the effect that arbitrary conditions imposed by the ITO while granting the change cannot be upheld, and that he cannot deny lawful deductions due to the assessee under the Act. The Gauhati High Court in Assam Frontier Tea Ltd.'s case (supra) pointed out that the legislative intent and policy underlying the provision appear to be clearly to give consent, save in exceptional circumstances, with or without conditions. The Calcutta Bench of the Tribunal in Harbanslal Malhotra & Sons Ltd.'s case (supra) held that a condition that the depreciation allowance should be reduced proportionately where the previous year consisted of only 3 months was an invalid condition being opposed to the provisions of the statute. Judging the present case by the principles laid down in the above decisions, it is clear that the conditions imposed by the ITO are unreasonable. The first and third conditions (conditions (a) and (c) in the order dated 30-12-1982) in effect mean the same thing, that the profit for the changed pervious year should not be less than the profit for the old previous year. We are unable to appreciate, given the vicissitudes of any business, how it would be possible for the assessee to comply with such a condition. It is the natural aim of every person carrying on business to improve the same and earn more profits. However, it would be impossible to accept such a condition as a sort of stipulation the fulfilment of which alone will entitle the assessee to the change. As pointed out by the Allahabad High Court in J.K. Synthetics Ltd.'s case (supra), such a condition is an impossible condition. The court, dealing with a similar condition, held as under:--
Condition (a) is not happily worded and is not easily understandable, what, in effect, it means is that the company should not show a loss for the last six months of the previous year of 18 months which may be set off against the profits of the first 12 months. This appears to be an impossible condition. No assessee can be asked to ensure that he will not suffer a loss during a particular period. To say that if a loss arises in the last six months it shall not be set off against the profits of the first 12 months is again a palpably illegal condition. A previous year whether it consists of 12 months or less or more is a unit of assessment and all the profits and losses arising in that previous year have to be taken into consideration. Section 4, which is the charging section, levies a charge on the income of the full previous year. In the case of a business, tax has to be levied on the profits and gains of the previous year. Profit here means the net profit ascertained after setting off losses and expenses against the gross profit. A reference may be made in this connection to the observations of Lord Parkar in Usher's Wiltshire Brewery Ltd. v. Bruce :
... Where a deduction is proper and necessary to be made in order to ascertain the balance of profits and gains, it ought to be allowed...provided there is no prohibition against such an allowance....
Therefore, in a previous year a loss arising from any activity has to be necessarily set off against the profits arising from other activities. It is only then that we can arrive at the net profits. It was, therefore, not open to the Income-tax Officer to stipulate that there shall be no loss in a part of the previous year or that if there was a loss, it shall not be allowed to be set off against the profits arising in the previous year. Such a condition was clearly contrary to the law and the Income-tax Officer had no jurisdiction to impose such condition.
The condition (d) is again an ambiguous condition and wholly superfluous. It is not clear as to what exactly the Income-tax Officer meant by saying that the change in the previous year should not result in the reduction of tax liability including the surtax. That, in fact, is not a condition to be imposed upon an assessee but is a consideration which has to be kept in mind by the Income-tax Officer while permitting the change of the previous year. He has to see that as a result of the change the assessee does not gain an undue advantage by way of reduction in tax liability. If he apprehends that there will be a reduction in tax liability, he can impose suitable conditions to guard against it. But to say that there will be no reduction in tax liability as a result of the change in the previous year is by itself not a condition.
If the Income-tax Officer meant that the tax on the income of the original previous year should not be less than the income of the changed previous year, he was clearly imposing an impossible condition. The tax liability depends directly on the quantum of income and if the income varies the tax liability is bound to vary. No one can prevent it. Once the length of the previous year is fixed the income of that previous year has to be taxed, whether the income is less or more than the income of the original previous year.
These observations clearly show that the conditions (a) & (c) imposed in the present case are invalid and have to be struck off. It may also not be out of place to mention here that, as pointed out by the Supreme Court in two decisions CIT v. A. Raman & Co. [1968] 67 ITR 11 and CIT v. Calcutta Discount Co. Ltd. [1973) 91 ITR 8, the law cannot compel any trader to carry on his business in such a manner as to earn maximum profits. Condition (b) regarding installation of new plant and machinery after 31-12-1982 is clearly unreasonable. We agree with Mr. Poddar that it is not for the ITO to impose such conditions as would curtail or restrict the assessee's right to carry on its business in such manner as it thinks fit. Condition (d) which gives a sort of an 'advance ruling' that any "sudden unforeseen expenses, theft expenses not wholly unforeseen" would be disallowed in the assessments. We are unable to fathom the logic behind the condition. In a proforma Profit & Loss account, naturally the assessee would not, nor could be expected to, take into account any 'unforeseen' or 'sudden' expenses which the assessee may be obliged to incur in the course of its business. Such unforeseen expenditure may or may not relate to the business of the assessee. That will be a question to be decided when an occasion arises, which will be when the assessment proceedings are set in motion. This condition, inasmuch as it, as stated earlier, seeks to issue an 'advance ruling', is indicative of the approach of the ITO while assenting to the assessee's request for a change in its previous year.
7. We may now deal with the main strand that runs through the order of the ITO refusing to recognise the change. As stated earlier, no separate order of refusal was passed; it is in the assessment order itself that the ITO withdrew the consent, earlier accorded, to the change. The main thrust of the ITO is that the assessee has attempted to evade tax by seeking to change its previous year. We are unable to uphold this view taken by him, for more than one reason. First, he has not, either at the time of according his consent to the change or while withdrawing his consent, found any of the reasons advanced by the assessee, vide its application dated 18-12-1982, justifying the change in its previous year, to be a pretense or make-believe. Therefore, it would be hardly just or proper to brand the assessee's request as being motivated by oblique considerations, such as evasion of tax and merely because the assessee was unable to comply with the conditions set by the ITO. Secondly, it is not as if the reduction in the profits for the assessment year 1983-84 by reason of the change in the previous year would be decisive of the question. The assessee is a company and has to pay tax on every rupee of its income. It grows tea and between January and March of every calendar year, normally, it has to incur heavy cultivation expenses. The first flush of the tea crop starts flowing in only by the end of April or early May. In the very first year of the change, viz., assessment year 1983-84, therefore, the cultivation expenses of two calendar years - those of 1982 and 1983 - would have been debited in the accounts. That would explain the fall in the profits in the first year. However, that feature will not be repeated in the succeeding years when the status quo ante would be restored, in the sense that the accounts of each succeeding year would show the cultivation expenses incurred in the last three months (Jan. - Mar.) only. The receipts from sale of tea would also be disclosed during the earlier part of the accounting period. It would not therefore be proper to jump at the conclusion that merely because there is a reduction in the profits of the first year of change the very motive in changing the accounting year is to evade taxes. It would not be out of place here to note that the Act itself now recognises only one 'previous year' that ending on 31st March every year.
8. We are, therefore, of the opinion that the departmental authorities were not justified in withdrawing the permission granted to the assessee to change its previous year. We uphold the objection of the assessee in the appeal for the assessment year 1983-84. The order of the CIT(A) is reversed and the Assessing Officer is directed to reframe the assessment taking the previous year as 31-3-1983.
9. This point raised in the appeals for the assessment years 1984-85 and 1985-86 will also have to be accepted consequently. The ITO has taken the calendar year as the previous year. That has been found by us to be wrong. The assessments will therefore have to be made by adopting 31-3-1984 and 31-3-1985 as the respective previous years. Mr. Poddar's further objection to the income computed in the assessments for these years under Section 144 is also to be upheld. At page 24 of the paper book, we find details regarding the total income determined in the earlier assessments. They are as under:--
Assessment year Returned income Assessed income
under Section 143(3)
1978-79 Rs. 9,51,659.00 Rs. 9,58,530.00
1979-80 Rs. 3,09,930.00 Rs. 3,67,710.00
1980-81 Rs. 2,09,854.00 Rs. 2,44,660.00
1981-82 Rs. 5,487.00 (Loss) Rs. 5,432.00 (Loss)
1982-83 Rs. 40,400.00 Rs. 40,400.00
Even in a best-judgment assessment under Section 144, the ITO must have regard for the past record of the assessee. He cannot act in a capricious manner while estimating the income. These principles are well-settled. Judging by the past record of the assessee, it is clear that the ITO was not justified in estimating the income at Rs. 60 lakhs for each of the assessment years. We set aside the assessments and direct the ITO to reframe them in accordance with law.
10. We may state that we have not accepted the plea of Mr. Lahiri that the issue Raised in all the appeals should be restored to the CIT(A) since we find that the CIT(A) has decided the issue on merits and therefore, it would be futile to restore the issue to him.
11. In the result, the appeals are allowed.