TaxTMI 
TaxTMI 
2005 (4) TMI 617
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....n the assessee's case where in adjustment made under section 143(1)(a) has resulted in reduction in the amount of loss returned. Assessee company returned a total loss of Rs. 10,76,54,544 and Rs. 7,61,09,733 for the two years respectively. Both the returns were processed under section 143(1)(a) of the Income-tax Act, 1961 (the Act). While processing the return under section 143(1)(a), Assessing Officer made the following disallowances for assessment year 1989-90: (Rs.) 1. Disallowance of Investment allowance on account of non-creation of reserve. ,31,49,567 2. Under Rule 6D ,230 3. Payment to Diners club ,000 4. Under section 43B - ESIS ,552 5. Entertainment expenses ,17,837 ,34,45,186 Thus, the adjusted total loss for assessment year 1989-90 amounted to Rs. 8,42,09,358. Similarly, for assessment year 1990-91, Assessing Officer made the following disallowances: (1) Under section 43-B (Rs.) (a) Surcharge, Madras (b) Sales-tax - Factory ,356 (c) CST - Factory ,256 (d) Sales-tax - Hyderabad ,500 (e) Interest on term loan from financial institution ,....
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...., it had succeeded. However, department was aggrieved by the order of the CIT(A) and hence this appeal. 5. Shri A.K. Tiwari, the learned D.R., submitted that the order of the CIT(A) cannot survive in view of the retrospective amendment made to section 143(1A) of the Act. The retrospective amendment, in substance, provides that assessee will be liable to pay additional tax even in a case where there is reduction in returned loss on account of adjustments made under section 143(1)(a) of the Act. Therefore, it was submitted by Mr. Tiwari that the appeal of the revenue be allowed. 6. At this juncture, Mr. F.V. Irani, the learned counsel for the assessee invoked Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 (ITAT Rules for short), contending that under the said Rule, assessee was entitled to support the order of the CIT(A) on the merits of the adjustments decided against it. Mr. Tiwari objected to Mr. Irani's contention on the ground that nothing survived for the assessee in view of the retrospective amendment, particularly when assessee has not preferred any appeal against the order of the CIT(A). 7. We are not aware of a direct decision in a case where a retr....
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....f the issues are decided in favour of the assessee, department will not be worse off. 9. However, one argument may be raised by the department on account of the retrospective amendment to section 143(1A) by the Legislature. It may be argued that on account of the retrospective amendment, department would have been able to collect some additional tax despite CIT(A)'s order, and now by permitting the assessee to take recourse to Rule 27, it may be able to collect either lesser or nil additional tax from the assessee. 10. In our view, the argument is quite specious. We may assume a situation where there was an explicit provision to levy additional tax even in loss cases. Despite such a provision, if the CIT(A) decided, for whatever reason, in favour of the assessee that no additional tax is payable on account of loss, then, under such circumstances, would it not have been possible for the assessee to invoke Rule 27 for grounds decided against him? In our opinion, it would have been possible to do so because of the principle laid down in Rule 27. In that case, department would not have had the argument of retrospective amendment. Hence, intervention by the Legislature midway,....
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.... follow the contents of Circular No. 259 Circular No. 259 has been held to be binding by Gujarat High Court in the case of Bharat Vijay Mills Ltd. v. ITO [1985] 154 ITR 786 and by Patna High Court in the case of CIT v. Tata Robins Frazer Ltd. [1987] 163 ITR 8862. In the latter case it was held that if in a year, total income is a loss, statutory reserve need not be created. Statutory reserve not having been created, development rebate will not be allowed, but the rebate to be actually allowed in future will be calculated and carried forward to the next assessment year. In the former case, Gujarat High Court issued a writ of Mandamus to follow the above circular of the Board directing the authorities to condone genuine deficiency in creating the reserve subject to the same being made good by the assessee by creating additional reserve in the succeeding assessment year. In the instant case, it cannot be denied that there was a genuine deficiency in creating the reserve as assessee had incurred heavy losses. In any case, not only was there a genuine deficiency, but the foregoing discussion would unequivocally suggest that mere non-creation of adequate reserve would not call for a prim....
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....se they are reflected on the liability side of the balance-sheet. Therefore, it was imperative on the part of the Assessing Officer to have enquired into the matter instead of treating it as prima facie inadmissible. We delete the disallowance. 20. The issue relating to the allowance of depreciation was argued by Mr. Irani at the time of the hearing. However, we do not deal with the same as it does not arise out of the order of the CIT(A). 21. In the result, both the appeals of the department are partly allowed for statistical purposes. Shri I.P. Bansal, (Judicial Member) 22. I have perused the order of my learned brother. I remain unable to persuade myself to agree with that order. 23. The revenue is in appeal before us, only on the ground that CIT(A) failed to appreciate that the Additional Tax under section 143(1A) is leviable if there is variation between returned income/loss and income/loss finally determined on processing the return under section 143(1)(a) and therefore he was wrong in holding that additional tax is not leviable where returned loss is reduced by making the prima facie adjustment. The grounds of appeal which is common to both the appeals have b....
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....concessions were made in respect of certain adjustments. For example, disallowance made under rule 6D of Rs. 74,230 and Rs. 1,000 being payment made to Diner Club for assessment year 1989-90. Similarly for that year, it is observed by CIT(A) as follows: ...However, the main adjustment made for the assessment year 1989-90 relating to the disallowance of investment allowance amounting to Rs. 2,31,49,567 was in order, as admittedly the assessee was not entitled to this deduction for the assessment year 1989-90. The assessee had not created the requisite reserve and could not have been allowed deduction in investment allowance for the assessment year 1989-90. (Emphasis supplied) 25. It is observed that prior to decision of CIT(A), the assessment for assessment year 1989-90 was completed by Assessing Officer under the provisions of section 143(3) vide his order dated 13-11-1991. The result of that assessment might have been in the mind of assessee while agitating the adjustments made in respect of certain items and also making concession in respect of investment allowance. 26. Similarly for assessment year 1990-91 no dispute was raised by assessee in regard to ad....
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....ew of the amendment made in statute by Finance Act, 1991 with retrospective effect from 1-4-1989, the law has been made clear that additional Income-tax is leviable even where the loss declared is reduced or converted into income. Thus, the learned Departmental Representative's argument is that the order of CIT(A) deleting the additional tax be reversed being against the provisions of law as in force for the relevant period. 30. On the other hand, Shri F.V. Irani, the learned counsel appearing on behalf of assessee did not controvert the above arguments of learned DR. However, he contended that the adjustments made were wrong as these were not adjustments fit to be made under the provisions of section 143(1)(a). When pointed out by us that the assessee was merely a respondent and no cross appeal or cross objection had been filed, how could this argument be accepted in the appeal of the revenue, he in this behalf contended that he could support the appellate order by any ground decided against him. Hence the reference of rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 (For short "Rule 27") came into consideration. Thereafter, he argued regarding the merits in regar....
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....efore us by the learned counsel for the assessee is that it was open to the assessee to create a reserve for investment allowance in any of the subsequent assessment years. Acceptance of this argument amounts to a finding that reserve created by the assessee or which the assessee may now create in relation to subsequent assessment would meet the requirement of section 32A. This in my humble opinion amounts to grant of relief or advantage to the assessee for in excess of the relief originally allowed by the CIT(A). It should also be borne in mind that the assessee had admitted before the learned CIT(A) that he was not entitled to investment allowance. It also appears that it has never been the case of the assessee that he created reserve during any subsequent period. 33. In view of the discussion in above paragraphs, I hold that the learned Assessing Officer rightly levied the additional Income-tax in respect of adjustment of Rs. 2,31,49,567 made by him. I therefore reverse the order of CIT(A) and restore that of Assessing Officer to this extent. In respect of other adjustments as well as for assessment year 1990-91 I agree with the view taken by my learned brother. 34. In the....
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....rence between learned Members is confined to the above assessment year on the specified amount and restricted their arguments accordingly. I therefore, proceed to consider the above difference in assessment year 1989-90 only. 37. The Assessing Officer purporting to have disallowed Rs. 2,31,49,567 claimed by the assessee as investment allowance in "adjustment" and issued show-cause notice to the assessee why additional tax be not levied on the assessee in terms of section 143(1A) of the Income-tax Act on the disallowances made. The assessee thereafter moved application under section 154 of the Income-tax Act challenging the disallowance and adjustments made by the Assessing Officer under section 143(1)(a) of the Income-tax Act determining loss of the assessee at Rs. 8,42,09,358. The Assessing Officer in his order under section 154 of the Income-tax Act dated 12th August, 1991 maintained that assessee did not create any "reserve" and therefore, claim of investment allowance was rightly disallowed. There was no mistake in the order requiring rectification in the intimations sent under section 143(1)(a) of the Income-tax Act. In line with the above view, the Assessing Officer also i....
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....me-tax (Appellate Tribunal) Rules and sought to support the order of the learned CIT(A) by arguing that adjustment/disallowance of Rs. 2,31,49,567 was wrong and could not be made under section 143(1)(a) of the Income-tax Act. The adjustment made was beyond jurisdiction. If adjustment could not be made, question of levy of additional tax did not arise. This way impugned order was supported. 42. The learned Accountant Member found ample force in the contention raised on behalf of the assessee and held in his proposed order that the assessee could support the impugned order of the CIT(A) by invoking Rule 27 of the IT(AT) Rules. He further observed that the assessee could create requisite reserve i.e., 75% of investment allowance in the year or years in which the same was to be actually allowed to the assessee in future. As the assessment year under consideration was a loss, there was no need for the assessee to create the statutory reserve. The investment allowance was required to be calculated and carried forward to be allowed in future. For the above view the learned Accountant Member relied upon Circulars of CBDT, Nos. 259 and 305, held to be binding on the revenue by Hon'bl....
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....nt of having filed the appeal. According to the learned Judicial Member, if the assessee was permitted to raise above ground that he could create reserve for claiming investment allowance in any of the subsequent years, this would amount to granting relief or advantage to the assessee far in excess of relief originally allowed by the learned CIT(A). The learned Judicial Member further observed that before the learned CIT(A) the assessee had admitted that he was not entitled to investment allowance and that it was not assessee's case that reserve could be created in the subsequent year. For the aforesaid reasons the learned Judicial Member upheld levy of additional tax on adjustment of Rs. 2,31,49,567 made by the Assessing Officer under section 143(1)(a) and consequent levy of additional tax under section 143(1A) of the Income-tax Act on above adjustment. 46. On account of above difference the matter has come up in appeal before me as a Third Member. 47. I have heard both the parties. As stated earlier, the learned representatives of the parties confined their arguments to levy of additional tax on adjustment of Rs. 2,31,49,567 made under section 143(1)(a) read with sectio....
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.... in the dismissal of the appeal for that year by invoking Rule 27 of the IT(AT) Rules. But for other assessment year 1989-90 a contrary view has been taken in the proposed order. The mere fact that adjustment in assessment year 1989-90 involved claim of investment allowance and in assessment year 1990-91 involved disallowance under section 43B of the Income-tax Act did not make any difference as far as application of Rule 27 of IT (AT) Rules was concerned. Thus contradictory view taken by the learned Judicial Member was not justified on facts and circumstances of the case. 51. The learned counsel further pointed out that the present assessee had suffered huge losses and on account of accumulated losses, no tax was payable by the assessee on account of disallowances made by the Assessing Officer under section 143(1)(a) or under section 143(3) of the Income-tax Act. The assessee was aggrieved when asked to pay additional tax under section 143(1A) of the Act. Learned counsel further pointed out that the learned CIT(A) had decided the matter on 15-1-1992. The revenue had filed the appeal before the Appellate Tribunal on 12-3-1992. The Legislature amended section 143(1A) much later a....
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....penditure. The Commissioner (Appeals), however, allowed deduction to the assessee under section 35 of the Act. The Tribunal held that since the assessee was engaged in the field of manufacturing certain equipment in the sphere of electronics and was found to have changed its technology very frequently, the expenditure incurred by the assessee in acquiring designs and drawings from the foreign company was for improving its efficiency or its profit earning apparatus, and the advantage, if any, was not of a permanent degree but shortlived in view of further vast developments in technology and, therefore, the advantage was not in the capital field. On a reference: Held, affirming the decision of the Tribunal, that the expenditure incurred by the assessee on acquisition of designs and drawings was revenue expenditure. 53. Shri Irani further contended that observations of the learned Judicial Member that the assessee did not raise plea relating to creation of reserve in future before the Assessing Officer or learned CIT(A), was not correct. He drew my attention to notes on return filed by the assessee, rectification application moved under section 154 before the Assessing Off....
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....f the learned CIT(A) that adjustment relating to claim of investment allowance amounting to Rs. 2,31,49,567 was rightly made by the Assessing Officer under section 143(1)(a) of the Income-tax Act. The assessee sought to challenge aforesaid finding of the learned CIT(A). In my considered opinion the claim made by the assessee under Rule 27 of the IT(AT) Rules is quite in order. In case it is accepted that the Assessing Officer could not make adjustment of Rs. 2,31,49,567 under section 143(1)(a) claimed as investment allowance, the question of levy of additional tax in terms of section 143(1A) would not arise. Admittedly it is a case of assessed loss and no tax is payable by the assessee on account of adjustment made by the Assessing Officer. The assessee is aggrieved only on account of additional tax demanded from the assessee. There is no question of allowing any relief to the assessee not claimed by the assessee in appeal before the CIT(A). The assessee has sought to non-suite the revenue by seeking a finding that no additional tax is payable by the assessee as adjustment of investment allowance is not valid under section 143(1)(a) of the Income-tax Act. In case assessee's ple....
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....ectify above order. The above request was rejected by the Assessing Officer holding that there was no mistake in the intimation issued by the Assessing Officer relating to claim of investment allowance. 57. Thereafter the assessee filed an appeal before the learned CIT(A) and among other raised the following ground:-- (3) Deputy Commissioner of Income-tax has erred in considering claim of Investment allowance in the returned total loss though it was clearly stated in the computation of total income that the investment allowance has been claimed for determination purpose. It is evident from the notes in the returns as also from the contention raised before the learned CIT(A) that the assessee knew fully well that on account of loss, statutory reserves could not be created and therefore, there was no question of deduction of investment allowance. The assessee's case was that it had claimed that investment allowance be determined (computed) in accordance with law and carried forward as provided in the Statute. As far as creation of reserve was concerned, the same could be created in the subsequent years when investment allowance was to be "actually allowed". The cla....
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....in whole or in part. It is axiomatic that until the development rebate is quantified in the relevant assessment year after the installation of the machinery, there cannot be any question of carrying forward of the rebate. If it is not quantified, nothing will be available for carrying forward and the assessee will be denied the benefit of the rebate. The claim for development rebate has to be made by the assessee in the year of installation of the machinery. If in that year, the total income is a loss, the statutory reserve need not be created. Statutory reserve not having been created, development rebate will not be allowed, but the rebate to be actually allowed in future will be calculated and carried forward to the next assessment year. Development rebate will be allowed only in the year in which the statutory reserve is created. The outer limit for creation of the reserve and availing of the privilege of development rebate must be confined to eight years. This view is based not only upon the interpretation of sections 33 and 34 but also on the circulars of the CBDT which are binding on the Income-tax authorities." (Emphasis supplied) Similar view has been taken by t....