2025 (9) TMI 1506 - HC - Income Tax

s.143(1) processing after 1.4.2001 not an assessment; s.14A applies; s.36(1)(vii) and s.36(1)(viia) distinct, no double relief

HC held the ITAT erred: where the s.143(1) intimation was issued after 1.4.2001, processing under s.143(1) is not an assessment and the proviso cannot be ... Reopening of assessment - Addition u/s 14A - Expenditure incurred in relation to income not includible in total income - CIT(A) restricted this disallowance u/s 14A of the Act to 2% - ITAT went on to hold that under proviso to Section 14A AO cannot make any disallowance for any assessment year beginning on or before 1.4.2001 - whether Section 14A of the Act barred original assessment on the basis of retrospective amendment? ITAT interpreted the provision in the manner that the Assessing Officer is debarred from taking any action u/s 147 for any assessment year beginning on or before 1.4.2001, and, as per the provisions of the Act, the AO cannot make any disallowance in this regard u/s 14A of the Act. HELD THAT:- On facts, it is not in dispute that the intimation under Section 143(1) of the Act itself was issued on 30.3.2002, i.e., after 1.4.2001. Furnishing of books of accounts, documents and other details does not amount to true disclosure and after introduction of Section 143(1) and amendment to Sections 147 and 148 of the Act, the processing of return u/s 143(1) by itself, without anything more, does not tantamount to assessment, as while processing the return, the Assessing Officer does not apply his mind. As decided in Zuari Estate Development and Investment Company Ltd [2015 (8) TMI 480 - SUPREME COURT] as held it is significant that the acknowledgment is not done by any assessing officer, but mostly by ministerial staff. Can it be said that any ‘assessment’ is done by them? The reply is an emphatic ‘no’. The intimation under Section 143(1)(a) was deemed to be a notice of demand under Section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from the deeming provision. Therefore, there being no assessment under Section 143(1)(a), the question of change of opinion, as contended, does not arise. The issue as to whether Section 14A of the Act barred original assessment on the basis of retrospective amendment was categorically answered in the case of Honda Siel Power Products Ltd [2011 (2) TMI 1184 - DELHI HIGH COURT] proviso does not stipulate and state that section 14A of the Act cannot be relied upon during the course of the original assessment proceedings. The Assessing Officer was, therefore, required to disallow expenses incurred for earning exempt or tax-free income. Failure on the part of the Assessing Officer to apply section 14A when he passed the assessment order under section 143(3) of the Act dated March 7, 2003, has prima facie resulted in escapement of income. The proviso is not intended to apply to the cases of the present nature. The object and purpose of the proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases, which have attained finality. Applying the law as enunciated in various authorities, referred to above, to the facts of the present case, there is no doubt in our mind that the finding recorded by the ITAT was erroneous in law, as it proceeded on an erroneous consideration that it was a case of reassessment or that after 1.4.2001 and even original assessment was not permissible under law. Whether bad debts claimed u/s 36(1)(vii) cannot exceed provision of bad debts claimed under Section 36(1)(viia)? - The authoritative pronouncement in the case of Catholic Syrian Bank Ltd [2012 (2) TMI 262 - SUPREME COURT] clinches the issue, wherein it was held that the provisions of Section 36(1)(vii) and Section 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields.The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(vii-a) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2). Decided against the revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether, on the facts and circumstances of the case, the proviso to Section 14A bars reopening of assessment under Section 147 for assessment years beginning on or before 1.4.2001 where proceedings had not attained finality as per Board Circular No.11/2001. 2. Whether the proviso to Section 14A applies to assessments reopened under Section 147 when the assessment sought to be reopened relates to the first assessment made under Section 147 (i.e., whether Section 14A prohibits original assessment action post-1.4.2001 for AYs beginning on or before 1.4.2001). 3. Whether bad debts can be allowed simultaneously under Section 36(1)(vii) and Section 36(1)(viia) (i.e., whether the two provisions are distinct and permit independent deductions or whether one limits the other to prevent double deduction). ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Scope of proviso to Section 14A and applicability to reopening under Section 147 / to original assessment proceedings Legal framework: Section 14A provides that no deduction shall be allowed for expenditure incurred in relation to income not includible in total income; sub-sections were expanded to empower the Assessing Officer to determine such expenditure by prescribed methods; proviso (introduced by Finance Act) states that nothing in the section shall empower the Assessing Officer to reassess under Section 147 or enhance/reduce a refund or otherwise increase liability under Section 154 for any assessment year beginning on or before 1.4.2001. Board Circular No.11/2001 directed that assessments which had become final before 1.4.2001 should not be reopened to disallow expenditure under Section 14A. Precedent treatment: Authorities establish that Section 14A was retrospective in operation but the proviso/statutory clarification was intended to protect assessments which had attained finality prior to 1.4.2001 from reopening merely because of retrospective operation; case law distinguishes between reassessment/change of opinion and original assessment proceedings and holds intimation under Section 143(1) is not an assessment order (i.e., no formation of opinion) and therefore does not by itself confer finality. Interpretation and reasoning: The Court examined whether the instant proceedings constituted reassessment barred by the proviso or original assessment proceedings where Section 14A could be applied. The return for the relevant year was processed/intimated under Section 143(1) after 1.4.2001; the processing/intimation under Section 143(1) without substantive scrutiny does not amount to a conclusive assessment or change of opinion. The proviso operates to bar reassessment and rectification for years beginning on or before 1.4.2001 only where the assessment has already attained finality before that date; it does not immunize original assessment action taken after 1.4.2001 in the course of forming an assessment (e.g., under Section 143(3) or by reopening where proper grounds exist). The ITAT's conclusion that the Assessing Officer was entirely debarred from taking any action under Section 147 for the AY beginning before 1.4.2001 was held to misconceive the nature of the prior proceedings and to misapply the proviso. Ratio vs. Obiter: Ratio - the proviso to Section 14A bars reassessment or enhancement/rectification only where the assessment had attained finality before 1.4.2001; intimation under Section 143(1) made after 1.4.2001 does not constitute final assessment such that the proviso applies to bar action; original assessment action or valid reopening where assessment had not attained finality is permissible and Section 14A can be applied. Observational points concerning Board Circular No.11/2001 and the legislative history are explanatory. Conclusion: The proviso to Section 14A does not preclude the Assessing Officer from taking action in circumstances where the assessment had not attained finality prior to 1.4.2001; the ITAT's deletion of the Section 14A disallowance on the basis that the proviso completely barred action was erroneous. Questions 1 and 2 are therefore answered in favour of revenue and against the assessee (i.e., proviso does not operate to immunize the assessment in the present facts). Issue 3 - Allowability of bad debts under Sections 36(1)(vii) and 36(1)(viia) Legal framework: Section 36(1)(vii) permits deduction for bad debts written off as irrecoverable in the accounts subject to requirements of Section 36(2); Section 36(1)(viia) (proviso/clauses) prescribes specific treatment/limits for certain classes of debts (e.g., scheduled banks) and Section 36(2)(v) acts as a check against double benefit by requiring debit to provision accounts in certain circumstances. Precedent treatment: Supreme Court authority establishes that Sections 36(1)(vii) and 36(1)(viia) are distinct and independent heads of deduction; the proviso and Section 36(2)(v) must be read together to prevent unintended double deductions, but generally the provisions operate in their respective fields and do not automatically interdict mutual operation. Interpretation and reasoning: The Assessing Officer sought to restrict deduction under Section 36(1)(vii) to the extent of provisions under Section 36(1)(viia). The appellate authorities relied on a prior order in the assessee's own case and applicable precedent to hold that the assessee was entitled to claim bad debt deduction under Section 36(1)(vii) where the requirements of that provision (and Section 36(2)) were met, and that Section 36(1)(viia) does not nullify or absorb the general provision except insofar as Section 36(2)(v) specifically prevents double claims. The Court relied upon the authoritative pronouncement that the two provisions are separate and independent and that the proviso to Section 36(1)(vii) operates with reference to the specific category covered by clause (viia) without obliterating Section 36(1)(vii). Ratio vs. Obiter: Ratio - Sections 36(1)(vii) and 36(1)(viia) are distinct, independent deductions; the proviso and Section 36(2)(v) prevent double deduction where applicable, but do not displace the general allowance under Section 36(1)(vii) when its conditions are satisfied. Observations regarding social policy underlying viia are explanatory. Conclusion: The ITAT's and CIT(A)'s allowance of bad debts under Section 36(1)(vii) in addition to applicable provisions under Section 36(1)(viia) is consistent with binding authority; the third question is answered in favour of the assessee and against the revenue. Final disposition interrelationship Though Questions 1 and 2 were decided in favour of the revenue (the proviso to Section 14A did not bar the Assessing Officer's action in these facts), the Court upheld the allowance of bad debts under Sections 36(1)(vii) and 36(1)(viia); in view of the latter conclusion, the revenue appeals were dismissed. No order as to costs.