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Nahar Spinning Mills Ltd. v. Assistant Commissioner Of Income Tax.
Structured Summary of the Opinion (N.K. Agrawal, J.)
Factual and Procedural Background
This is a writ petition under articles 226 and 227 of the Constitution challenging the intimation/order dated 20 May 1994 issued by the Assistant Commissioner of Income-tax under section 143(1)(a) of the Income-tax Act, 1961. The Assessing Officer imposed tax and additional tax totalling Rs. 1,53,60,734 on the petitioner-company for the assessment year 1993-94 after making adjustments under the first proviso to section 143(1)(a), which the petitioner contends were not legally permissible.
The petitioner is a public limited company (registered at Ludhiana) engaged in manufacturing and exporting woollen yarn, hosiery and cotton garments. A return under section 139(1) for AY 1993-94 (accounting year ending 31 March 1993) was filed before the due date (31 December 1993) declaring taxable income at Rs. 16,36,98,920 and tax due was paid on 31 December 1993. A balance-sheet and a chartered accountant's report certifying deduction under section 80HHC were filed with the return.
The Assessing Officer, invoking prima facie adjustment powers under the first proviso to section 143(1)(a), raised taxable income to Rs. 18,11,04,420 and reduced the deduction claimed under section 80HHC from Rs. 11,00,97,292 to Rs. 9,29,16,897. The reduction was said to be due to exclusion of certain investment and portfolio income shown in the balance-sheet (investment income Rs. 2,30,76,352 and portfolio income Rs. 49,83,195) from business profits on which the deduction under section 80HHC had been calculated.
Procedurally, a notice under section 143(2) was issued on 12 July 1994 and a regular assessment under section 143(3) was thereafter made; the present writ petition was filed on 16 July 1994. The petitioner had, in a preceding assessment year, obtained relief after pursuing rectification under section 154 and an appeal to the Tribunal.
Legal Issues Presented
- Whether the Assessing Officer could, under the first proviso to section 143(1)(a) of the Income-tax Act, make prima facie adjustments (including reduction of deduction under section 80HHC) without hearing the assessee and without conducting further investigation.
- Whether the Assessing Officer was entitled to treat amounts shown in the balance-sheet as non-business income (investment income and portfolio income) and thereby exclude them from profits eligible for deduction under section 80HHC.
- Whether the availability of alternative remedies under the Act (notably rectification under section 154 and challenge during regular assessment under section 143(3)) precluded the exercise of writ jurisdiction under articles 226 and 227 in the present facts.
Arguments of the Parties
Appellant's (Assessee) Arguments
- The power to make "prima facie" adjustments under section 143(1)(a) is limited to obvious, apparent mistakes — matters that are "on the face of it" or "apparent from record" — and does not extend to substantial adjustments requiring investigation or evidence.
- Reliance on Circular No. 689 (24 August 1994) of the Central Board of Direct Taxes: prima facie disallowance may be made only where an incorrect claim is apparent from information in the return or accompanying accounts/documents; the Assessing Officer could not go behind the return or annexed documents to disallow deduction.
- The Assessing Officer had no jurisdiction to disallow a claim merely because the assessee had no additional proof to support it; several High Court decisions were cited in support of the contention that the Assessing Officer could not reopen the assessee's accounts to recalculate book profits or deductions under section 80HHC.
- Even if an alternative remedy exists, invocation of writ jurisdiction under article 226 is not necessarily barred; precedents were cited in support of that proposition.
Respondent's (Revenue) Arguments
- The Assessing Officer possesses the power to make any adjustments specified in the three clauses of the first proviso to section 143(1)(a), and no opportunity of hearing is required before making such adjustments.
- Clause (iii) of the proviso permits the Assessing Officer to make adjustments in respect of any loss carried forward, deduction, allowance or relief claimed in the return which, on the basis of information in the return/accounts/documents, is prima facie inadmissible.
- Specific entries in the assessee's balance-sheet (income from non-trade investments and portfolio income) justified the Assessing Officer's prima facie adjustments: since the assessee itself treated trade investment dividend as "income from other sources" in the computation, it was arguable that other investment incomes should similarly have been treated as non-business income.
- Alternative statutory remedies were available (rectification under section 154 and challenge during regular assessment), and the existence of those remedies weighed against entertaining the writ petition in the present circumstances.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| S.R.F Charitable Trust v. Union of India, [1992] 193 ITR 95 (Delhi High Court) | Cited by the assessee to support the proposition that the Assessing Officer lacked power to disallow a claim without proof and could not reopen deductions on insufficient grounds. | The Court noted this decision as relied upon by the assessee; the Court did not decide the merits of that principle in this petition but recorded that such authorities had been placed before it. |
| J.K.S Employees' Welfare Fund v. ITO, [1993] 199 ITR 765 (Rajasthan High Court) | Cited by the assessee in support of the limited scope of prima facie adjustments under section 143(1)(a). | The Court acknowledged the citation; it did not adjudicate on the legal correctness of the principle in the present petition, preferring to direct the assessee to statutory remedies. |
| God Granites v. Under Secretary, CBDT, [1996] 218 ITR 298 (Karnataka High Court) | Cited by the assessee to contend against the Assessing Officer's power to reopen accounts and recalculate deductions. | Referred to as part of the assessee's array of authorities; the Court declined to enter into a discussion on the merits and relied on alternative remedies instead. |
| Tanna Exports v. M.G. Kamat, [1993] 202 ITR 219 (Bombay High Court) | Cited by the assessee for the proposition that Assessing Officer could not recast book profits or deductions under section 143(1)(a) in the absence of proper jurisdiction. | Noted by the Court as cited by the assessee; the Court did not decide the legal question raised by that authority in the writ proceedings. |
| Mahalakshmi Glass Works Ltd. v. Sunil Gupta, Asst. CIT, [1993] 203 ITR 658 (Bombay High Court) | Cited by the assessee to support limits on Assessing Officer's powers under prima facie adjustment provisions. | Recorded as part of the assessee's submissions; the Court did not address the merits in view of its decision to direct the assessee to alternative remedies. |
| Kamal Textiles v. ITO, [1991] 189 ITR 339 (Madhya Pradesh High Court) | Cited by the respondents to support the proposition that the Assessing Officer has power to make adjustments deducible from the return and annexed documents under section 143(1)(a). | The Court noted this authority as relied on by the respondents for the scope of Assessing Officer's powers; it formed part of the authorities weighing in favour of the availability of prima facie adjustments. |
| Kerala State Coir Corporation Ltd. v. Union of India, [1994] 210 ITR 121 (Kerala High Court) | Cited by the respondents in support of the Assessing Officer's jurisdiction to make adjustments deducible from the return/accounts. | Noted by the Court as respondent's authority; the Court relied on the existence of such authorities when considering the parties' positions but did not rule on their correctness in this petition. |
| Modem Fibotex India Ltd. v. Deputy CIT, [1995] 212 ITR 496 (Calcutta High Court) | Cited by the respondents to support the legal scope of adjustments under section 143(1)(a). | The Court recorded this citation among respondent's authorities; it did not resolve the substantive question in the writ petition. |
| Jindal Strips Ltd. v. State of Haryana, [1996] 100 STC 457; ILR [1996] 1 P & H 323 | Cited by respondents regarding the handling of proceedings when alternative remedies exist — reference to rehearing and alternative remedy principles. | The Court referred to this decision in discussing the relevance of alternative remedies and the appropriateness of seeking rectification rather than invoking writ jurisdiction in the present facts. |
| Swaraj Mazda Ltd. v. Deputy CIT, [1992] 105 CTR 109 (this Court) | A prior case before the same court in which the assessee was directed to pursue rectification under section 154 rather than immediate writ relief when similar issues arose. | The Court relied on the view taken in Swaraj Mazda as supportive of directing the assessee to invoke statutory remedies (section 154) rather than adjudicating the merits in writ proceedings. |
| Indo-Gulf Fertilizers & Chemicals Corp. Ltd. v. Union of India, [1992] 195 ITR 485 (Allahabad High Court) | Cited by the assessee to support the proposition that writ jurisdiction may still be invoked despite availability of alternative remedies, depending on circumstances. | Noted by the Court as part of the assessee's authorities; the Court nevertheless found the alternative remedy appropriate in the particular facts and did not grant writ relief. |
| Khatau Junkar Ltd. v. K.S. Pathania, [1992] 196 ITR 55 (Bombay High Court) | Cited by the assessee in support of permissibility of invoking constitutional jurisdiction despite alternative remedies. | Recorded as cited by the assessee; the Court, on the facts, accepted the respondents' contention regarding alternative remedy and dismissed the writ petition. |
| S. Mageshwari v. Asst. CIT, [1993] 201 ITR 472 (Karnataka High Court) | Cited by the assessee to show circumstances in which writ jurisdiction may be exercised even if statutory remedies exist. | Noted by the Court among the assessee's authorities; notwithstanding these citations, the Court advised pursuit of section 154 and regular assessment remedies. |
Court's Reasoning and Analysis
The Court set out the factual matrix: the return filed, the claimed deduction under section 80HHC, the annexed balance-sheet entries showing investment and portfolio income, and the adjustments made by the Assessing Officer under the first proviso to section 143(1)(a).
The Court analyzed the competing legal submissions. The assessee's counsel contended that prima facie adjustments are limited to obvious, facial mistakes and cannot involve substantial adjustments requiring investigation or going behind the return and documents; reliance was placed on Circular No. 689 and several High Court decisions. The respondents' counsel countered that clause (iii) of the first proviso to section 143(1)(a) authorizes adjustments in respect of deductions which, on the basis of information in the return/accounts/documents, are prima facie inadmissible; the respondents pointed to specific balance-sheet entries and the inconsistency (trade investment dividend shown as "income from other sources" while other investment incomes were not so shown) as justifying prima facie disallowance.
The Court considered the procedural posture: the assessee had previously obtained relief in an earlier assessment year by pursuing rectification under section 154 and appeal to the Tribunal; in the present year a notice under section 143(2) had been issued on 12 July 1994 and regular assessment under section 143(3) had been completed thereafter. Given these facts and the availability of statutory remedies (section 154 rectification and challenge in regular assessment), the Court found it appropriate — on the facts and circumstances — to require the assessee to pursue those remedies rather than to adjudicate the substantive question of the scope of section 143(1)(a) in the writ petition.
The Court therefore declined to enter into a discussion on the merits of the applicability of section 143(1)(a) and the Assessing Officer's jurisdiction to make adjustments thereunder, directing the assessee to seek rectification under section 154 and to raise the points during the regular assessment proceedings, if necessary.
Holding and Implications
DISPOSITION: The writ petition is dismissed. No costs.
Implications:
- The direct effect on the parties: the impugned intimation/order of 20 May 1994 (the adjustments made under section 143(1)(a) and the resulting taxation) stands challenged but the petition for immediate writ relief is dismissed; the assessee is directed to pursue alternative statutory remedies (rectification under section 154 and remedies available in the regular assessment and on appeal).
- The Court expressly refrained from deciding the substantive question regarding the proper scope of prima facie adjustments under section 143(1)(a); consequently, no new precedent on that substantive issue was established by this decision.
This summary is based exclusively on the content of the provided opinion. No information not present in the opinion has been added.
N.K Agrawal, J.:— This is a petition under articles 226 and 227 of the Constitution, seeking the quashing of intimation/order dated May 20, 1994, passed and issued by the Assistant Commissioner of Income-tax under section 143(1)(a) of the Income-tax Act, 1961 (for short “the Act”). A sum of Rs. 1,35,59,265 by way of income-tax and a sum of Rs. 18,01,469 by way of additional income-tax under section 143(1A) of the Act, totalling Rs. 1,53,60,734 were imposed on the petitioner-company for the assessment year 1993-94. The said amount of tax and additional tax was imposed by the Assessing Officer after making certain adjustments under the first proviso to section 143(1)(a), which are said to be not permissible in law.
2. The petitioner is a public limited company incorporated under the Companies Act, 1956, with its registered office at Ludhiana. The petitioner is engaged in the business of manufacturing and exporting woollen yarn, hosiery and cotton garments. A return of income was filed by the petitioner under section 139(1) of the Act before the due date (December 31, 1993), for the assessment year 1993-94 relevant to the accounting year ending March 31, 1993. Taxable income was declared at Rs. 16,36,98,920 after claiming various allowances, deductions, depreciation, etc., under various provisions of the Act. Tax as due, as per the return, was paid on December 31, 1993. A copy of the balance-sheet along with the report of the chartered accountant certifying the deduction admissible under section 80HHC of the Act was also filed along with the return. The Assessing Officer, while making prima facie adjustments under the first proviso to section 143(1)(a), raised the taxable income from Rs. 16,36,98,920 (as claimed by the petitioner), to Rs. 18,11,04,420. Deduction claimed by the assessee under section 80HHC of the Act in respect of the profits from export business was reduced from Rs. 11,00,97,292 (as claimed) to Rs. 9,29,16,897.
3. The Assessing Officer, while reducing the deduction under section 80HHC of the Act, looked into certain income shown by the assessee in its balance-sheet under the head “Other income”. Deduction under section 80HHC was reduced on account of exclusion of income from investments amounting to Rs. 2,30,76,352 and portfolio income amounting to Rs. 49,83,195 from business profits on which deduction under section 80HHC had been calculated. Certain other disallowances were also made.
4. Shri B.S Gupta, learned senior advocate appearing for the assessee, has argued that no substantial adjustments, which required investigation or evidence, are contemplated when such power is exercised under section 143(1)(a) of the Act without hearing the assessee. Prima facie adjustments, if any, contemplated only those mistakes which were not required to be established by any process of investigation. The plea put forward by Shri Gupta is that the term “prima facie” meant “on the face of it” or “apparent from record”. He has also drawn our attention to Circular No. 689 dated August 24, 1994, issued by the Central Board of Direct Taxes (reproduced in [1994] 209 ITR (St.) 75), whereby it has been clarified by the Board that prima facie disallowance may be made only in the case of an incorrect claim if such incorrect claim is apparent from the existence of other information in the return or the accompanying accounts or documents. Shri Gupta has contended that the Assessing Officer could not go behind the return or the documents annexed to it while disallowing a deduction. The Assessing Officer was required to follow the procedure prescribed in section 143(2) and to issue a notice to an assessee for regular assessment under section 143(3) of the Act in a case where he wanted to seek certain clarification or to make an investigation.
5. Shri B.S Gupta, learned senior counsel for the assessee, has challenged the adjustment made by the Assessing Officer primarily with the plea that the Assessing Officer had no power to disallow a claim on the ground that there was no proof in support of the claim made by the assessee. Reliance has been placed on a decision of the Delhi High Court in S.R.F Charitable Trust v. Union of India, [1992] 193 ITR 95; a decision of the Rajasthan High Court in J.K.S Employees' Welfare Fund v. ITO, [1993] 199 ITR 765; and a decision of the Karnataka High Court in God Granites v. Under Secretary, CBDT, [1996] 218 ITR 298. Two decisions of the Bombay High Court in Tanna Exports v. M.G Kamat, [1993] 202 ITR 219; and the other in Mahalakshmi Glass Works Ltd. v. Sunil Gupta, Asst. CIT, [1993] 203 ITR 658, have also been referred to in support of the plea that the Assessing Officer had no jurisdiction to reopen the account of the assessee to re-calculate the book profits or to recalculate the deduction under section 80HHC of the Act.
6. Shir R.P Sawhney, learned senior counsel for the respondents, has in reply asserted that the Assessing Officer has the powers to make any adjustments of the nature specified in any of the three clauses of the first proviso to section 143(1)(a). No opportunity of hearing is required to be given to the assessee while making such adjustments. Clause (iii) of the proviso permitted the Assessing Officer to make any adjustment in respect of “any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible”. Shri Sawhney has vehemently argued that the deduction, which had been claimed by the assessee in his return under section 80HHC, was actually not available to that extent on the basis of the information available from the balance-sheet of the company which had been annexed to the return.
7. It has been pointed out by Shri Sawhney, learned senior counsel for the respondents, that the assessee had shown certain income under the head “Other income” in its balance-sheet as under:
Rs. (1) Income from trade investments (dividend income) 14,58,966 (2) Income from non-trade investments: (i) Investment income 2,30,76,352 (ii) Portfolio income 49,83,195 Total 2,80,59,547
8. The assessee has shown income from trade investments (dividend income) amounting to Rs. 14,58,966 under the head “Income from other sources” in the statement of taxable income also filed along with the return. Income from non-trade investments and portfolio income were, however, not shown as “income from other sources” in the said statement. Shri Sawhney argued that if the income from trade investments was treated by the assessee himself as “income from other sources” in the computation of income, it was only natural that income from non-trade investment and portfolio income should have been similarly shown and treated as “income from other sources” and not as business income. The Assessing Officer on the basis of these entries available in the balance-sheet and in the computation of income, made prima facie adjustments.
9. Shri R.P Sawhney, learned senior counsel for the respondents, has challenged the contention of the assessee against the powers of the Assessing Officer under section 143(1)(a) of the Act, relying on a decision of the Madhya Pradesh High Court in Kamal Textiles v. ITO, [1991] 189 ITR 339; that of the Kerala High Court in Kerala State Coir Corporation Ltd. v. Union of India, [1994] 210 ITR 121; and that of the Calcutta High Court in Modem Fibotex India Ltd. v. Deputy CIT, [1995] 212 ITR 496. It has been argued by Shri Sawhney that the jurisdiction of the Assessing Officer under section 143(1)(a) is limited not only to the obvious but also to that which is deducible from the return as filed without doubt or debate. This is clear from the language of the section and is supported by the authority as well as the circulars issued by the Central Board of Direct Taxes in this connection.
10. Shri Sawhney has also argued that an alternative remedy was available to the assessee and, therefore, there is no justification to invoke the jurisdiction of this court under articles 226 and 227 of the Constitution. In the preceding assessment year also, a similar adjustment was made and the assessee in that year moved an application under section 154 of the Act. That application was rejected by the Assessing Officer but, in appeal, the assessee succeeded in getting the required relief from the Tribunal. It is, therefore, argued that the assessee can approach the Assessing Officer under section 154 of the Act, seeking rectification of the disallowance made under section 80HHC. It is also pointed out that assessment under section 143(3) of the Act has subsequently been made for the assessment year 1993-94 after issuing notice to the assessee under section 143(2) on July 12, 1994. Though the notice was issued on July 12, 1994, the assessee filed the present writ petition on July 16, 1994. It is, therefore, contended by Shri Sawhney that the assessee can not only move an application under section 154 of the Act but could also point out the mistakes, allegedly committed by the Assessing Officer while making adjustments under section 143(1)(a) of the Act, during the regular assessment proceeding.
11. In Jindal Strips Limited through Shri Sham Lal Gupta v. State of Haryana, [1996] 100 STC 457 : ILR [1996] 1 P & H 323, a matter had arisen before this court in a writ petition in a case where an assessment order in a sales tax matter had been assailed. The question of alternative remedy was examined and, after quashing the assessment order, the matter was referred back for rehearing. Shri Sawhney has argued that, here also, even though the assessee might defend his right to invoke the jurisdiction of this court under article 226 of the Constitution, he may be asked to clarify the position before the Assessing Officer by moving a rectification application.
12. A similar matter was earlier examined by this court in Civil Writ Petition No. 3525 of 1990 (Swaraj Mazda Ltd. v. Deputy CIT, [1992] 105 CTR 109) and, vide order dated June 4, 1990, the assessee was directed to seek the alternative remedy by moving a rectification application under section 154 of the Act. In that case, the provisions of section 143(1)(a) of the Act were challenged on the ground that those were ultra vires the Constitution inasmuch as no notice was required to be issued before adjustments were made by the Assessing Officer in the allowances and deductions claimed by the assessee. The plea of the assessee was rejected.
13. Shri B.S Gupta, learned senior counsel for the assessee, has, in rejoinder urged that, even if an alternative remedy was available, the assessee was not debarred from invoking the jurisdiction of this court under article 226 of the Constitution inasmuch as the applicability of section 143(1)(a) in the given situation has been challenged and thereby the jurisdiction of the Assessing Officer is under attack, Reliance has been placed on a decision of the Allahabad High Court in Indo-Gulf Fertilizers and Chemicals Corporation Ltd. v. Union of India, [1992] 195 ITR 485; on a decision of the Bombay High Court in Khatau Junkar Ltd. v. K.S Pathania, [1992] 196 ITR 55; and on a decision of the Karnataka High Court in S. Mageshwari v. Asst. CIT, [1993] 201 ITR 472. Looking to the nature of the controversy, the plea of the respondents regarding the availability of the alternative remedy is accepted inasmuch as it is found to be appropriate, on the facts and in the circumstances of the case, that the assessee may explain the nature of deduction and the nature of the profits under controversy by moving a rectification application under section 154 of the Act in the preceding assessment year, similar remedy was availed of and the assessee, after explaining the nature of the profits, succeeded in appeal before the Tribunal. It has also to be noticed that a notice under section 143(2) of the Act has already been issued to the assessee for the assessment year 1993-94 and it appears that assessment under section 143(3) has thereafter been made. If that was so, the assessee can challenge the order, if any, made in the regular assessment, reducing the claim under section 80HHC of the Act. The view taken by this court in Swaraj Mazda's case, [1992] 105 CTR 109, in similar circumstances, supports it. We, therefore, do not think, appropriate to enter into a discussion on the merits of the applicability of section 143(1)(a) of the Act and the jurisdiction of the Assessing Officer to make adjustments thereunder. The assessee is advised to seek alternative remedy available under the Act.
14. In the result, the writ petition is dismissed. No costs.
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