Commissioner of Income Tax-I vs FAL Industries Ltd.

Prabha Sridevan, J.—The assessee is a manufacturer of typewriters and vacuum cleaners. It commenced a new industrial undertaking for

the manufacture of the above equipments during the previous year ending 31.12.1981 relevant to the assessment year 1982-83. The initial

assessment year for the purpose of deduction u/s 80HH of the Income Tax Act in respect of this new industrial undertaking, therefore, was 1982-

The assessee claimed that the ten assessment years would end with 1992-93 because there was a change of the previous year with regard to a

particular assessment year, viz. 1991-92. However, the Assessing Officer, following 185 ITR 63, held that it that would apply to this case and held

that what is important is ""the natural sequence of ten assessment years"", and did not accept the assessee''s claim. The Commissioner (I.T. Appeals)

confirmed this. The Tribunal, however, decided to allow the claim of the assessee and therefore, the Department has filed the appeals on the

following substantial questions of law:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that sales tax does not form part of total turnover for the

purpose of calculation of deduction u/s 80HHC ?

Whether in the facts and in the circumstances of the case, the Tribunal was right in holding that amount received out of local sale does not form

part of the total turnover, for the purpose of calculation of deduction u/s 80HHC ?

Whether in the facts and in the circumstances of the case, the Tribunal was right in holding that the interest accrued in the present assessment

year is not assessable to tax for the assessee following the mercantile system of accounting ?

Whether for the assessment year 92-93 the Tribunal is right in allowing the benefit u/s 80HH for the 11th year when the section specifically

allows benefit only for 10 assessment years of usual sequence?

Substantial question of law No. 1 :

The learned Senior Standing Counsel for the Revenue would submit even at the outset that the first question of law is decided against the

Revenue by the Supreme Court in Commissioner of Income Tax, Coimbatore Vs. Lakshmi Machine Works, .

Substantial question of law No. 2 :

As regards the second question law, the learned Sr. Standing Counsel submitted that the same was also decided against the revenue in

Commissioner of Income Tax - I Vs. Ashok Leyland Ltd., .

Substantial question of law No. 3 :

The learned Sr. Standing Counsel submitted that the claim of exclusion in respect of the interest accrued cannot be granted because, before the

Assessment Officer, the assessee had claimed exclusion on the ground that it had been accrued but not received and the assessee had been

adopting mercantile system of account. However, the Commissioner of Income Tax [Appeals] had dealt with this issue as though the claim of the

assessee was that the ""interest had accrued but had not become due"" for the relevant year.

The learned Sr. Standing Counsel submitted that even assuming without admitting that this was a case where the interest had been calculated on

an accrued but not received basis and the accounting had to be one on due basis, still if the interest had become due as on 31st March of the

previous year, then it had to be treated as income of that year and merely because he gets the right to receive the interest on the following day viz.,

1st of April, it cannot be said that interest does not form part of the income of the previous year. The learned Sr. Standing Counsel also submitted

that though in 291 ITC 137 Commissioner of Income Tax, Madurai v. Tamilnadu Mercantile Bank Ltd., Tuticorin., similar issue was raised, that

case dealt with interest on securities and the same may be distinguished.

The learned Counsel for the assessee would however submit that there was no change in the stand of the assessee with regard to the interest

received right from the beginning and even before the assessing officer, this had been treated as income accrued ""but not due"" and the learned

Counsel referred to the relevant page in the typed set of papers. Therefore, the learned Counsel submitted that the previous order does not

warrant interference especially because it has been decided in favour of the assessee in 291 ITC 137 (cited supra).

We have gone through the materials on record. The Assessing Officer had rejected the claim for exclusion of interest accrued. The assessing

officer also dealt with the increased income on the principle of accrual and confirmed the assessment order. The Tribunal however, rightly held, in

our opinion, that the opinion of the Commissioner of Income Tax that once it has accrued, it should be included as income is not correct since the

very term ""accrued but not due"" would show that right to receive the interest had not arisen to the assessee and the interest was receivable only

from the 1st of April of the next year. In fact, an identical issue came up before this Court in 291 ITR 137 [cited supra]. In that case also, the

assessee had adopted mercantile system of accounting as in this case and it was contended before the Bench that ""even u/s 145 of the Act, method

of accounting on due basis is recognised. The assessee is following mercantile system and so he is entitled to the benefit of Section 145 of the Act.

The Division Bench of of this Court after going through the relevant statutory provisions viz., Sections 18 and 147 of the Income Tax Act, held

as follows :

In view of the deletion of the Section 18 of the Act with effect from April 1, 1989, the third proviso to Section 145(1) was inserted with effect

from April 1, 1989, which is a saving clause. Although the amendment was with effect from April 1, 1989, it clearly provides that any income by

way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee only where

no method of accounting is regularly employed by the assessee. In other words, if the assessee is maintaining cash system of accounting, the

aforesaid proviso would not apply. The legislative intent is that when the assessee is maintaining the cash system of accounting, income by way of

interest on securities will have to be charged to tax only when the assessee actually receives the interest and not on the date on which interest on

such securities might become due.

In the instant case, there is no change in the method of accounting by the assessee. The assessing Officer accepted the method of accounting

followed by the assessee during the earlier assessment years, but, without any change in circumstance, changed the method of assessment during

the financial years in question, which in our considered opinion, is unsustainable. As already observed, even though Section 18 of the Act was

deleted, the assessee is taxable for interest on securities only on specified dates when it becomes due for payment, in view of third proviso to

Section 145(1) of the Act, which was in force during the relevant assessment years, as well as in the light of the well settled principles laid down in

the catena of decisions referred to above.

In the result, these appeals are dismissed answering the substantial question of law raised against the Revenue and in favour of the assessee. No

costs.

Therefore, this question is decided against the Revenue and in favour of the assessee.

Question of law No. 4 :

Mrs. Pushya Sitaraman, learned Senior Standing Counsel appearing on behalf of the Revenue referred to Rockweld Electrodes India Limited v.

C.I.T., (1990) 185 ITR 63 where, paragraph 11 and 20 read as follows :-

The facts, therefore, remain that for the assessment year 1971-72 income for the period January 1, 1969, to May 31, 1970, was assessed, for

the assessment year 1972-73 income from June 1, 1970, to May 31, 1971 was assessed and for the year 1973-74 the income which was brought

to tax was of the previous year starting from June 1, 1971, and ending with May 31, 1972. Therefore, no assessment was made for the year

1970-71 due to change allowed in the previous year. That is because the last date of the changed previous year did not fall within the financial year

preceding the assessment year 1970-71. So far as the present case is concerned, the initial assessment year is 1968-69 and the four assessment

years immediately succeeding the initial assessment years are 1969-70, 1970-71, 1971-72 and 1972-73. The relief contemplated u/s 80J(2) came

to an end with the assessment year 1972-73. Therefore, the assessment year 1973-74 falls outside the scope of Section 80J(2) of the Act. Hence,

the assessee is not entitled to the relief asked for u/s 80J(2) in the assessment year 1973-74. The words ""immediately succeeding assessment

years"" appear in several other provisions such as Section 72(3), etc. Under such circumstances, the Tribunal rightly pointed out that the concept of

assessment year"" has got to be understood in the manner prescribed under the provisions of the Act and not with reference to a particular

assessee as canvassed for by learned Counsel appearing for the assessee.

Thus it emerges that whenever the assessee is permitted to get relief for a specified number of consecutive assessment years, the Courts have

consistently held that the assessment years should be taken in natural sequence. In the present case, the assessee got relief u/s 80J(2) of the Act for

the assessment year 1968-69 and, therefore, the subsequent four assessment years are naturally 1969-70, 1970-71, 1971-72 and 1972-73.

Thus, the last assessment year for which the assessee can get deduction u/s 80J(2) of the Act would be only the assessment year 1972-73. In the

instant case, the assessee changed its accounting year from December 31, 1969, to May 31, 1970, with the result there was no taxable income for

the assessment year 1970-71. But it is not necessary for us to consider in this case whether in any of the four subsequent assessment years the

assessee had taxable income or he was assessed to tax or not. Hence, the Tribunal was correct in upholding the order passed by the authorities

below on this point. In that view of the matter, we answer the question referred to us in the affirmative and against the assessee. The assessee is

directed to pay the cost to the Revenue. Counsel''s fee is fixed at Rs. 500.

While the Assessing Officer and the Commissioner (I.T. Appeals) have given their findings on the basis of Rockweld Electrodes'' case, the

Appellate Tribunal opted to differ but did not give reasons why it differed, apart from stating so.

Though the learned Counsel appearing for the petitioner would stress that the language of Section 80HH differs from 80J, and the Judgments

relied on by the learned Counsel for the Revenue Ms. Pushya Sitharaman, all related to cases arising out of 80J and in 80J, the words ""immediately

succeeding"" are used. We really think that the basis on which decisions were made did not turn on the usage of the words immediately succeeding

but the construction of the words ""assessment year"".

The assessee commenced a new industrial undertaking for manufacture of vacuum cleaners during the previous year ending 31.12.1981,

relevant to assessment year 1982-83. The initial year for deduction u/s 80HH in respect of revenue i.e. was 1982-83. The assessee is allowed

deduction for 10 assessment years. There was a change in the accounting year from December to June. Therefore, the assessment year 1985-86

covered the period from 01.01.1983 to 30.06.1984. There was no assessment for the assessment year 1984-85. So the assessee claimed his

10th year was 1992-93. According to the revenue the natural sequence of assessment years should be followed and if so, the 10th year was

1991-92.

In Kar Mobiles Limited Vs. Commissioner of Income Tax, , the held thus :

The fact that the assessee had changed with effect from April 1, 1976, the previous year or the financial year to the year ending September 30, and

the previous year for the assessment year 1978-79 was consequently from April 1, 1976 to September 30, 1977, and there was no previous year

for the assessment year 1977-78 will not advance the case of the assessee for claiming relief u/s 80J for the assessment year 1980-81 also. It was

only because there was no previous year for the assessment year 1977-78 and consequently there was no computation period for the purpose of

relief u/s 80J for that assessment year, that the assessee could not get any relief u/s 80J for the assessment year 1977-78. The said position cannot

make the assessee entitled to get the relief u/s 80J for the assessment year 1980-81.

In Premier Cable Co. Ltd. Vs. Commissioner of Income Tax, Cochin, ., the Supreme Court has clearly explained how the words ""assessment

year"" should be understood. In that case also, the assessee had followed mercantile system of accounting in the previous year relevant to the

assessment year 1967-68. By its letter dated April 21st, 1975, the assessee had requested that its accounting year be changed from the yea ending

March 31 to the year ending September, 30. The Supreme Court held thus :

We find it difficult to agree. Section 2(9) defines assessment year to be the period of 12 months commencing on the first day of April every

year. It is a standard period of 12 months commencing on 1st April of every year. It does not depend upon one or the other assessee and whether

or not he had a previous year relevant to a particular assessment year. It is as invariable as the calendar year. The ""assessment years"" mentioned in

Sections 33 and 80-J must be read in this light. The unabsorbed development rebate u/s 33 and the unabsorbed deduction u/s 80-J may be carried

forward only for the 8 and 4 assessment years respectively that follow the assessment year relevant to the previous year in which the said

development rebate and deduction were first earned. The fact that in the instant case, the assessee did not have a previous year relevant to a

particular assessment year that fell within these spans of 8 and 4 assessment years respectively is of no consequence to the calculation of the

periods for which the aforesaid development rebate and deduction can be carried forward.

It was argued before the Supreme Court that under the provisions of Section 4, the charge for the levy of income tax was imposed on a person

in respect to his previous year and if an assessee had no particular previous year, then, there was no assessment year which could be related to

and since the assessee had no previous year relevant to the assessment year 1975-76, calculating the period of 8 and 4 assessment years

respectively for the carry-forward of the aforesaid unabsorbed development rebate and deduction, Assessment Year 1975-76 was not to be

considered and these periods had to extend to Assessment Year 1976-77.

Therefore, it is clear from the above that period of 12 months commence from the first day of April every year, which is the assessment year as

defined u/s 2(9), would not depend upon one or the other assessee and whether or not he had a previous year relevant to a particular assessment

year. It is as invariable as the calendar year and the assessment year mentioned in Section 80HH must be construed in the same manner as the

Supreme Court has held in the above Judgment.

Though the assessee in the present case had changed the previous year and contended that there is no assessment for the year 1984-1985, it

would not in any way change the manner in which the ten assessment years should be calculated. Naturally, sequence of ten years must be

followed. Therefore, the question of law raised by the revenue is answered in favour of the revenue. This tax case is allowed. No costs.