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Ito v. Gujarat Power Corp. Ltd.
Structured Summary of the Provided Opinion
Factual and Procedural Background
The respondent-assessee filed a return for the assessment year 1991-92 showing nil income, stating that the company had commissioned its business during that assessment year. The return included a note that the respondent had received Rs. 5.50 crores from the Government of Gujarat and the Gujarat Electricity Board as an advance towards share capital. Because the amount was not required immediately, it was placed in a short-term bank deposit and earned interest of Rs. 1,90,299. The assessee treated this interest as not being revenue income (on the basis of the Andhra Pradesh High Court decision in CIT v. Nagarjuna Steel Ltd.), deducted it from pre-operative project expenditure of Rs. 11,26,347, and claimed it was not taxable. The return was filed on 31-12-1991 and assessment was made on 19-10-1992.
The assessing officer issued a notice under section 143(1)(a) of the Income-tax Act, treating the interest sum as income for 1991-92 and levying additional tax. The assessee appealed to the Commissioner (Appeals), which dismissed the appeal on 12-8-1993. The assessee then appealed to the Tribunal, which allowed the appeal by an order dated 19-11-1998. The revenue (appellant) challenged the Tribunal's order before the court, seeking admission of its appeal and a hearing on the questions raised.
Legal Issues Presented
- Whether interest earned on funds received before commencement of business (Rs. 1,90,299) is revenue income taxable in the hands of the assessee for assessment year 1991-92, or whether it can be deducted from pre-operative/project cost (as per the view taken in CIT v. Nagarjuna Steel Ltd.).
- Whether the assessing officer could initiate proceedings under section 143(1)(a) based on a subsequent higher-court pronouncement (specifically the Supreme Court decision in CIT v. Bokaro Steel Ltd.) that treats such receipts as taxable revenue.
- Whether a substantial question of law arises warranting admission of the revenue's appeal against the Tribunal's order allowing the assessee's appeal.
Arguments of the Parties
Appellant's (Revenue) Arguments
- The Tribunal erred in allowing the assessee's appeal because the Supreme Court in CIT v. Bokaro Steel Ltd. (1999) held that amounts of a revenue nature received by a company before commencement of business cannot be treated as capital receipts and are taxable as income from an independent source.
- Given the Supreme Court's ruling in Bokaro, the interest of Rs. 1,90,299 ought not to have been deducted from project cost and should instead have been treated as income—thus a substantial question of law arises and the appeal should be admitted.
Respondent-assessee's Arguments
- At the time the return was filed, the assessee relied on the Andhra Pradesh High Court decision in CIT v. Nagarjuna Steels Ltd., which supported treating such pre-commencement receipts as not forming part of revenue and not taxable; the assessee followed that view in good faith and disclosed the facts in a note attached to the return.
- The assessee could not have anticipated the later Supreme Court decision in Bokaro and filed its return according to the law as it stood at the time of filing.
- The Departmental circular dated 4-4-1989 (CBOT) and Circular No. 689 (24-8-1994) counsel that where a claim is based on a decision of a High Court or Tribunal, the assessing officer should not disallow such a claim merely because another court has taken a contrary view; thus initiation of proceedings under section 143(1)(a) was not called for.
- Reliance was placed on section 119 of the Income-tax Act to argue that Board instructions/circulars are binding on income-tax authorities and should have been followed in this case.
- Additional cases were relied upon to show the limitation on the power under section 143(1)(a) and to support the proposition that the law prevailing at the time of filing the return must be considered.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Nagarjuna Steel Ltd. (1988) 171 ITR 663 (AP) | Applied for the proposition (as per Andhra Pradesh High Court) that income received by a company before commencement of business would not be treated as revenue income and thus would not be taxable; used by the assessee to justify deducting interest from project cost. | The court noted that this was the prevailing view at the time the return was filed and that the assessee had relied on this decision and disclosed facts accordingly; this supported the Tribunal's conclusion in favour of the assessee. |
| CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) | Held that where an amount in the nature of revenue is received by a company before it commences business, such amount cannot be treated as a capital receipt and is taxable as income from an independent source (Supreme Court position relied upon by the revenue). | The court acknowledged the Bokaro position relied upon by the appellant but held that Bokaro was a subsequent pronouncement relative to the filing of the return; the controlling principle for section 143(1)(a) is the law in force at the time the return was filed, so Bokaro did not justify upsetting the Tribunal's order in the facts of this case. |
| Modern Fibotex Ind. Ltd. v. Deputy CIT & Ors. (1995) 212 ITR 496 (Cal) | Used to explain limitations on the power under section 143(1)(a) and the principle that the assessing officer must consider the law prevailing at the time the return was filed. | The court accepted the summed-up principle from such authorities that subsequent changes or pronouncements in the law are not to be considered when invoking section 143(1)(a) proceedings; this principle informed the court's conclusion that no substantial question of law arose. |
| CIT v. Hindustan Electrographite Ltd. (1998) 229 ITR 16 (MP) (as cited) | Relied upon to support the contention regarding the temporal limitation on assessing officer's power under section 143(1)(a) (i.e., law prevailing at the time of filing governs assessment actions). | The court treated this and similar authorities as reinforcing the proposition that the assessment action must be judged against the legal position prevailing at the time of filing; applied as part of the body of authorities leading to dismissal of the appeal. |
| S.M. Trivedi v. Addl. CIT (1981) 130 ITR 73 (MP) | Invoked in support of the submission that subsequent legal pronouncements or amendments cannot be retrospectively asserted in proceedings under section 143(1)(a). | The court considered this among the cited cases as supporting the governing principle that the law at the time of filing the return is decisive for initiation of section 143(1)(a) proceedings; applied in upholding the Tribunal's order. |
Court's Reasoning and Analysis
The court set out the competing positions and evaluated them in light of procedural timing and precedent:
- It recited the factual posture: the assessee had disclosed receipt of the advance funds and interest in a note annexed to its return and had, pursuant to the then-prevailing case law (Nagarjuna), treated the interest as not being revenue and thus not taxable but deductible from project costs.
- The appellant argued that the Supreme Court's decision in Bokaro established that such receipts are revenue and taxable and that the Tribunal erred in allowing the assessee's appeal.
- The respondent relied on the existence of a bona fide, reasonably arguable contrary view in a High Court (Nagarjuna) at the time of filing, relevant Departmental circulars (CBOT circular dated 4-4-1989 and Circular No. 689 dated 24-8-1994), and section 119 (binding nature of Board's instructions upon income-tax authorities) to contend that the assessing officer should not have disallowed the claim or initiated proceedings under section 143(1)(a).
- The court considered authorities relied upon by the respondent (including Modern Fibotex and others) and summarised their combined effect: the assessing officer must apply the law as it stood when the return was filed; subsequent pronouncements or amendments should not be used to initiate section 143(1)(a) proceedings.
- The court concluded that the law to be considered in respect of initiation of proceedings under section 143(1)(a) is the law in force at the time of filing the return. Given that the assessee had filed the return in accordance with the legal position prevailing at that time and had disclosed the relevant facts, the Tribunal's order allowing the assessee's appeal was found to be just and legal.
- On that basis the court held that no substantial question of law arose from the revenue's challenge sufficient to admit and entertain the appeal.
Holding and Implications
Holding:
The appeal is dismissed. The court expressly found that no substantial question of law arose and dismissed the appeal with no order as to costs.
Implications (direct effect and scope):
- Direct effect on the parties: The Tribunal's order allowing the assessee's appeal (thereby treating the interest as not taxable for assessment year 1991-92, in the circumstances and on the facts disclosed) stands affirmed by this court; the revenue's challenge has failed.
- Legal/practical implication stated by the court: The controlling principle for initiating proceedings under section 143(1)(a) is the law in force at the time the return was filed. Subsequent judicial pronouncements or legal amendments cannot be invoked retroactively to justify initiation of section 143(1)(a) proceedings against a return filed in accordance with the then-prevailing law and with full disclosure of relevant facts.
- No new precedent was laid down by the court beyond its application of the settled principle about temporal application of law to section 143(1)(a) proceedings; the decision affirms the Tribunal's factual and legal conclusion in the present case.
This summary is based exclusively on the text of the provided opinion. No information not contained in that opinion has been added.
3. The respondent-assessee had filed a return of income for the assessment year 1991-92 showing "nil" income as the company had commissioned its business during the relevant assessment year. Along with the return a note was filed to the effect that during the said assessment year the respondent-assessee had received a sum of Rs. 5.50 crores from the Government of Gujarat and from Gujarat Electricity Board as an advance towards share capital and as the said amount was not required by the respondent-company immediately, the respondent-company had deposited the same with a scheduled bank in short-term deposit and the company had earned Rs. 1,90,299 by way of interest. It was further stated that the said amount of interest which was received was not revenue income as the company had not commenced business during the relevant assessment year and, therefore, the respondent-company had deducted the said amount from the expenditure of Rs. 11,26,347 which was an expenditure pertaining to pre-operative project expenditure and it had pleaded that a sum of Rs. 1,90,299, which was received as interest was not taxable. It was further stated in the said note that the said amount of interest was not income and that it would reduce the cost of the project, on the basis of the judgment delivered in the case of CIT v. Nagarjuna Steel Ltd. (1988) 171 ITR 663 (AP). The said return was filed on 31-12-1991, and the assessment was made on 19-10-1992.
4. The appellant received a notice under the provisions of section 143(1)(a) of the Income Tax Act, 1961, (hereinafter referred to as "the Act"), that adjustment of interest on the loss which was declared was not proper as the amount of Rs. 1,90,230 was in fact income of the respondent-assessee for the assessment year 1991-92 and, therefore, the said amount ought not to have been deducted from the cost of the project and should have been treated as an income and accordingly additional tax was levied. Being aggrieved by the said order, the respondent assessee challenged the order before the Commissioner (Appeals). After hearing the respondent-assessee the appeal was dismissed by the order dated 12-8-1993. Being aggrieved by the order, respondent-assessee filed an appeal before Tribunal and the said appeal was allowed by an order dated 19-11-1998.
5. The revenue has been aggrieved by the said order passed in appeal and, therefore, has approached this court with a prayer that the appeal be admitted and be heard on the question referred to hereinabove.
6. We have heard learned advocate Shri Naik appearing for the appellant. It has been submitted by learned advocate Shri Naik appearing for the appellant that in the instant case the Tribunal had clearly erred by allowing the appeal for the reason that the honourable Supreme Court had decided in CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) that whenever any amount in the nature of revenue is received by a company before it commences its business, the income so earned cannot be treated as a capital receipt but it would be treated as an income of the assessee from any independent source and the said income becomes taxable. It has also been submitted by Mr. Naik that in view of the law laid down by the honourable Supreme Court, the Tribunal was in error while permitting the assessee to deduct the amount of interest from the cost of the project. It has been submitted by him that looking to the facts of the case an important and a substantial question of law has arisen and, therefore, the appeal deserves to be admitted.
7. In pursuance of the notice issued by this court, Shri J.P. Shah, learned advocate, has appeared for the respondent-assessee. It has mainly been submitted by him that at the time when the respondent-company had filed its return, the respondent-assessee was not aware of the law which was declared by the Honble Supreme Court in (1999) 236 ITR 315 (SC) (supra). The sum and substance of his submission is that at the time when the return was filed by the respondent-assessee the view which was expressed by the Honble Andhra Pradesh High Court in CIT v. Nagarjuna Steels Ltd. (supra) was very clear to the effect that any income which a company receives before it commences its business would not become revenue income and, therefore, the income which the respondent-company had received by way of interest was not revenue income and was not taxable. It has further been submitted that there was no suppression on the part of the respondent-company as the said fact had clearly been stated in the note annexed to the return for the assessment year 1991-92 which has been reproduced at page No. 16 of the paper book. It has further been submitted by him that at the time of filing of the return the assess is supposed to file his return as per the law prevailing at the relevant time. It has been submitted that at the time of filing of the return the respondent-assessee had no benefit of knowing the legal position which was pronounced by the honourable Supreme Court at a subsequent point of time after the return had been filed and the assessee cannot be expected to know the law which is to be pronounced by the Honble Supreme Court or any other court in future and in the circumstances the action of the respondent-authority under the provisions of section 143(1)(a) was not called for. He has relied upon the judgment delivered in case of CIT v. Nagarjuna Steels Ltd. (supra) to show that at the time when the return was filed one of the views with regard to treatment of income of an assessee-company which was earned before commencement of its business. It has thereafter been submitted that whenever there are two views possible, it is open to the assessee to accept one of the views and he may file his return accordingly. In support of his above referred submission, he has relied upon certain circulars which have been issued by the department from time to time. He has referred to a circular issued by the Central Board of Direct Taxes dated 4-4-1989. He has drawn our attention to para No. 9 of the said circular which reads as under :
"In the context of the legal positions as outlined above, it follows that it will not be permissible for the assessing officer to disallow a claim for deduction, allowance or relief in cases where the claim is made on the basis of the decisions of any High Court, Tribunal or other appellate authority, even though a contrary view in the matter may have been expressed by another High Court or another Bench of the Tribunal or any other appellate authority. The fact that the claim is based on a decision which has not been accepted by the Board will also not make any difference to this position. "
8. On perusal of the said circular it is very clear that it would not be open to the assessing officer to disallow a claim for deduction, allowance or relief in cases where the claim is made on the basis of a decision of any High Court, Appellate Tribunal or other appellate authority, even though a contrary view in the matter may have been expressed by another High Court or another Bench of the Tribunal or any other appellate authority. In the instant case according to him the view expressed by the Andhra Pradesh High Court which has been referred to hereinabove was clearly in favour of the assessee and, therefore, the assessee was entitled to claim the said benefit. He has, thereafter, referred to a Circular No. 689, dated 24-8-1994, (published at (1994) 120 CTR (St) 31) issued by Central Board of Direct Taxes giving guidelines with regard to disallowance of the claims made by the assessee. He has drawn our attention to para and example (2) of the said circular which reads as under :
"Example :
Deductions of items like income-tax, wealth-tax, personal expenses, depreciation claimed on conveyances under the head Salary, depreciation claimed under the head House property and the like. The items of disallowance should be such that no two opinions are possible on their inadmissibility. "
9. He has placed reliance also on section 119 of the Act to the effect that it is open to the Central Board of Direct Taxes to issue such orders, instructions and directions to the income-tax authorities which it may deem fit and as per the provisions of said section, the orders, instructions and directions given by the Central Board of Direct Taxes are binding upon the income-tax authorities. In view of the said legal position, he has submitted that the instructions given by the Central Board of Direct Taxes under the circular referred to hereinabove ought to have been followed by the income-tax authorities and, therefore, initiation of proceedings under the provisions of section 143(1)(a) of the Act were uncalled for by the income-tax authorities.
10. He has relied upon the judgment delivered by the Honourable Supreme Court and other courts referring to the effect of retrospective amendments made in legal position namely Modern Fibotex Ind. Ltd. v. Deputy CIT & Ors. (1995) 212 ITR 496 (Cal) ratio of which explains the limitation on the power under section 143(1)(a) of the Act. He has similarly relied on CIT v. Hindustan Electrographite Ltd. (1998) 229 ITR 16 (MP) (sic) and S.M. Trivedi v. Addl. CIT (1981) 130 ITR 73 (MP).
11. The sum and substance of the judgments cited by the learned advocate Shri J.P. Shah is that the assessing officer and the income-tax authorities have to consider the law which was prevailing at the time when the return was filed. Any subsequent amendment in the law or any pronouncement of law made subsequent to the filing of the return cannot be considered for the purpose of initiation of proceedings under the provisions of section 143(1)(a) of the Act.
12. We have carefully gone through the judgment cited by the learned advocates and after hearing them we are of the view that in this appeal no substantial question of law has arisen. The law laid down by the honble Supreme Court is clear and it is to the effect that the law which was in force at the time of filing of the return is to be considered for the purpose of initiating proceedings under the provisions of section 143(1)(a) of the Act. As the return was filed as per the legal position prevailing at the relevant time and as the assessee had revealed the relevant facts by way of a note, we are of the view that the order of the Tribunal is just and legal.
13. In the circumstances, we do not find any substance in the appeal. The appeal is dismissed with no order as to costs.
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