1990 (11) TMI 138 - HC - Income Tax

Court Upholds 12-Month Limit for 'Previous Year' in Tax Law Decision

The court upheld the Income-tax Appellate Tribunal's decision that the assessee's 'previous year' for a newly set up business could not exceed 12 months ... Previous Year, Reference Issues:1. Determination of the 'previous year' for a newly set up business under section 3 of the Income-tax Act, 1961.2. Whether the Income-tax Appellate Tribunal's interpretation of section 3 was legally correct.3. Whether the assessee was required to file a return for the assessment year 1981-82.Analysis:The judgment addressed two applications under section 256(2) of the Income-tax Act, 1961, filed by the assessee regarding the assessment years 1981-82 and 1982-83. The primary issue revolved around the determination of the 'previous year' for a newly set up business under section 3 of the Act. The assessee, a partnership firm, contended that its 'previous year' commenced on May 15, 1980, and ended on June 30, 1981, spanning 13.5 months. The Income-tax Officer disagreed, asserting that the firm should have filed a return for the assessment year 1981-82. The Appellate Assistant Commissioner sided with the assessee, recognizing a dissolution of the firm on March 31, 1980, and the formation of a new firm on May 15, 1980. However, the Revenue challenged this decision before the Tribunal.The Tribunal acknowledged the dissolution of the firm but disagreed with the assessee's chosen 'previous year' of 13.5 months. It held that the assessee was obligated to file a return for the assessment year 1981-82, covering the period from May 15, 1980, to March 31, 1981. The Tribunal directed a recalculation of income based on a 'previous year' ending on March 31, 1982, falling within the assessment year 1982-83. The Tribunal's decision was based on a strict interpretation of section 3, emphasizing that the 'previous year' could not exceed 12 months for a newly set up business.The court analyzed the relevant provisions of section 3 and affirmed the Tribunal's decision. It clarified that the assessee's business did not qualify under clause (e) of the section and emphasized the limitation of the 'previous year' to a maximum of 12 months. The court dismissed the application, highlighting that the questions raised by the assessee did not warrant a reference under section 256(2) as they did not present significant legal issues.In considering precedents cited by the assessee's counsel, the court distinguished the facts of the present case from previous decisions where Income-tax Officers had permitted 'previous years' exceeding 12 months. The court referenced the Supreme Court's decision in Esthuri Aswathaiah v. CIT and a judgment by the Madras High Court to support its conclusion. Ultimately, the court dismissed the applications, ruling against the assessee and emphasizing the adherence to the statutory provisions governing the determination of the 'previous year' for tax assessment purposes.