Provisional assessment cannot decide debatable issues or ignore binding law; capital exclusions under surtax rules were invalid.

Under provisional assessment under section 7 of the Companies (Profits) Surtax Act, 1964, the assessing officer could not determine disputed or debatable questions of fact or law or depart from binding law then prevailing; the provision was confined to summary collection on clear matters, so the assessee succeeded. The High Court also held that exclusion from capital computation of doubtful debts reserve, provision for doubtful debts, excess provision for taxation, proposed dividend, and Chapter VI-A deductions was unsustainable because those exclusions conflicted with the applicable legal position and exceeded the limited scope of provisional assessment; the assessee succeeded on that issue as well.

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Issues: (i) Whether, in a provisional assessment under section 7 of the Companies (Profits) Surtax Act, 1964, the Income-tax Officer could decide disputed or debatable questions of fact or law and depart from the law then prevailing. (ii) Whether the Income-tax Officer was justified in excluding from the capital computation the items relating to doubtful debts reserve, provision for doubtful debts, excess provision for taxation, proposed dividend, and Chapter VI-A deductions.

Issue (i): Whether, in a provisional assessment under section 7 of the Companies (Profits) Surtax Act, 1964, the Income-tax Officer could decide disputed or debatable questions of fact or law and depart from the law then prevailing.

Analysis: A provisional assessment is a summary and expeditious machinery for collection of tax. Its structure denies the assessee a personal hearing, evidence-led adjudication, and an appeal. The limited opportunity to object in writing does not convert it into a regular assessment. On that footing, the Income-tax Officer cannot adjudicate complicated or debatable issues, whether of fact or law, and must follow binding judicial determinations then applicable. A provisional assessment that ignores settled law or takes a view adverse to the assessee on controversial issues travels beyond the intended scope of the provision and becomes jurisdictionally defective.

Conclusion: The power under section 7 did not extend to deciding disputed or debatable issues or disregarding binding legal position; the assessee succeeded on this issue.

Issue (ii): Whether the Income-tax Officer was justified in excluding from the capital computation the items relating to doubtful debts reserve, provision for doubtful debts, excess provision for taxation, proposed dividend, and Chapter VI-A deductions.

Analysis: The exclusion of doubtful debts reserve and provision for doubtful debts was contrary to the binding view already taken by the High Court and the Tribunal on similar facts. The exclusion of excess provision for taxation and proposed dividend also ran counter to the then prevailing legal position accepted in comparable decisions. As regards Chapter VI-A deductions, amounts deductible under that Chapter are not amounts incapable of inclusion in total income; they are deductions from gross total income and do not fall within the expression used in rule 4 of the Second Schedule. The Officer therefore exceeded the permissible limits of provisional assessment by rejecting these items.

Conclusion: The exclusions from the capital computation were unsustainable and were rightly struck down in favour of the assessee.

Final Conclusion: The provisional assessment and the demand raised pursuant to it could not stand because the Officer acted beyond the statutory limits of provisional assessment and contrary to the law then prevailing.

Ratio Decidendi: In a provisional assessment intended for summary collection, the assessing authority cannot decide disputed questions of fact or law, nor ignore binding judicial precedent; it must confine itself to clear, undisputed matters and act within the legal position applicable at the time.

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