Gujarat Carbon Ltd. vs Deputy Commissioner of Income Tax (Asstt)

M.B. Shah, J.—The petitioner is a public limited company, having its registered office at Baroda. Up to the assessment year 1987-88, the period of previous year (accounting year) of the petitioner was from October 1 of a year to September 30 of the next year. The petitioner was submitting Income Tax returns accordingly and it was assessed on the basis of the said previous year. It is the contention of the petitioner that somewhere after March 31, 1988, either in May, 1988, or in June, 1988, a circular was issued by the Central Board of Direct Taxes ("the C.B.D.T." for short), permitting the assessees to change the period of their accounting year for the assessment year 1988-89, up to March 31, 1988. The circular was issued because of an amendment to section 3 of the Income Tax Act. As per the amended provisions of sub-section (2), "previous year", in relation to the assessment year, commencing on the 1st day of April, 1989, means the period which begins with the date immediately following the last day of the previous year relevant to the assessment year commencing on the 1st day of April, 1988, and ends on the 31st day of March, 1989. It is also contended by the petitioner that the said circular was published in the journal Income Tax Reports (see [1988] 171 ITR 220).

Accordingly, the petitioner-company filed its return of income for the assessment year 1988-89, comprising the period of 18 months from October 1, 1986, to March 31, 1988, on August 12, 1988. The said return was accompanied by an application dated August 9, 1988, u/s 3(4) of the Income Tax Act, 1961, for permitting the petitioner to change the period of assessment on the basis of the circular issued by the Central Board of Direct Taxes. By the said application, the petitioner requested that the change in the period of the previous year from October 1, 1986, to March 31, 1988 (18 months), be approved by considering the circular issued by the Central Board of Direct Taxes, and the press note dated June 10, 1988 (see [1988] 172 ITR 19). The petitioner has reproduced in the petition the contents of the entire circular. The relevant paragraph (2) thereof is as under (at page 220 of 171 ITR (St.)) :

"2. With a view to avoid various problems which may arise in the transitional year, there may be assessees who may like to extend their previous year relevant to the assessment year 1988-89 to 31st March, 1988. Such requests for the change of accounting year may be liberally allowed by the assessing authorities under the provisions of section 3(4) of the Income Tax Act, 1961, subject to the condition that the adoption of such a longer previous year does not result in any loss of revenue."

It is also averred that the aforesaid circular was required to be issued by the Central Board of Direct Taxes, in view of the amendment in the Income Tax Act, which provides that in the case of each assessee, the previous year relevant for the assessment year 1989-90 will compulsorily end on March 31, 1989. The circular also enables the assessee to change the previous year relevant for the assessment year 1988-89 to March 31, 1988, by providing that such requests for change of accounting year be liberally allowed u/s 3, sub-section (4), of the Income Tax Act, 1961. Of course, granting of such requests would be subject to the condition that adoption of such longer previous year does not result in any loss of revenue.

On the basis of the application of the petitioner-company, the petitioner was asked to appear before the respondent to explain the various points raised by him. The petitioner remained absent, and by its letter dated September 26, 1988 (annexure-C), explained the points raised by the respondent. By pointing out computations for the two relevant periods, viz., (i) from October 1, 1986, to September 30, 1987; and (ii) from October 1, 1986, to March 31, 1988, it was also clarified that the said change of accounting year by extending the period would not result in loss of revenue.

Finally, the respondent passed an order dated November 28, 1988 (annexure "G"), rejecting the application of the petitioner for change of accounting year. That order is challenged by the petitioner by filing this petition.

At the time of hearing of this matter, Mr. J. P. Shah, learned counsel appearing on behalf of the petitioner, vehemently contended that the order annexure "G" is arbitrary and bad in law, and is against the circular (see [1988] 171 ITR 220), dated February 4, 1988, issued by the Central Board of Direct Taxes.

As against this, Mr. Shelat, learned counsel appearing on behalf of the respondent, referred to the affidavit-in-reply, and pointed out that there would be loss of revenue, if the petitioner is permitted to change the previous year. For this purpose, he has relied upon the statement annexure "A" produced along with the affidavit-in-reply.

In our view, considering the statement annexure-A to the affidavit-in-reply, it is apparent that the approach adopted by the respondent is totally unreasonable. From the said statement, it is clear that if the period is taken as ending on September 30, 1987, the total tax payable would be Rs. 92,58,318, and if it is taken as ending on March 31, 1988, the total tax payable would be Rs. 1,12,75,081. The respondent wants to add Rs. 89,25,000 to Rs. 92,58,318 by holding that the petitioner is liable to pay penalty u/s 271(1)(c) of the Income Tax Act. For this purpose, it is necessary to refer to the said statement as a whole, which is as under :

--------------------------------------------------------------------------- Previous year Previous year ending on ending on 30-9-1987 31-3-1988 --------------------------------------------------------------------------- (Rs.) (Rs.) Taxable income calculated by the assessee 1,76,34,892 2,14,76,346 Tax payable : Income Tax 88,17,446 1,07,38,173 Surcharge five per cent. 4,40,872 5,36,908 --------------------------- Total 92,58,318 1,12,75,081 Less : T.D.S. 4,88,493 4,88,493 --------------------------- 87,69,825 1,07,86,588 Less : Advance tax 33,71,360 33,71,360 Tax in default for interest under section 215/217 53,98,465 74,13,228 Less : 140A paid on 11-8-1988 85,13,128 85,13,128 --------------------------- - - Interest u/s 215/217 from 1-4-1988, to 31-7-1988 2,69,923 3,52,223 Interest u/s 216 : (14,53,275 - 6 months) (23,24,775 - 3 months) 1,96,174 (21,25,529 - 6 months) (29,97,029 - 3 months) 2,55,861 Penalty u/s 273(1)(b) : (1) Assessed tax 92,58,318 1,12,75,081 (2) 83.33 per cent. of above 81,77,872 99,59,279 (3) Less : Advance tax and T.D.S. 38,59,833 38,59,833 (4) Tax in default 43,18,039 60,99,426 (5) Minimum penalty at 10 per cent. 4,31,803 6,09,942 (6) Maximum penalty 150 per cent. 64,77,058 91,49,139 Penalty u/s 271(1)(c) : (1) Minimum penalty 100 per cent. of tax sought to be evaded 89,25,000 - (2) Maximum penalty 200 per cent. 1,78,50,000 - Total tax, interest and penalties in both the situations : Total tax 92,58,318 1,12,75,081 Interest u/s 215/217 2,69,923 3,52,223 Interest u/s 216 1,96,174 2,55,861 Penalty u/s 273(1)(b) : Minimum 4,31,803 6,09,942 Penalty u/s 271(1)(c) : Minimum 89,25,000 - --------------------------- Total 1,90,81,218 1,24,93,107 ---------------------------

In support of the aforesaid stand taken by the Department, at the time of hearing of this matter, Mr. Shelat called an officer of the Department in the court, and after obtaining instructions from him, has submitted as under :

(i) for arriving at the conclusion that there would be loss of revenue, we have to refer to the provisions of section 271(1)(c) of the Act. According to him, as the petitioner had sought to evade tax liability, penalty is required to be imposed. But, if the change in the previous year is allowed, then the penalty u/s 271(1)(c) cannot be levied, and thereby, there would be loss of revenue.

(ii) for the earlier year also, the petitioner was permitted to change the period of previous year, and, therefore, for the subsequent year, it cannot be permitted to change the period of the previous year.

(iii) the petitioner-company is in the habit of making fraudulent claim of depreciation, and, therefore, it is liable to penalty u/s 271(1)(c) of the Act.

In our view, considering the facts of the present case and the figures mentioned in the statement annexure-A produced by the respondent, by permitting the petitioner to change the accounting year, it would not result in any loss of revenue. It is apparent that the respondent has taken a highly arbitrary stand and irrelevant attitude, by holding that penalty u/s 271(1)(c) of the Income Tax Act is required to be imposed, without considering the fact that the said section is not applicable in the present case. Section 271(1)(c) would apply to a case where the Assessing Officer, in the course of any proceeding under the Act, is satisfied that any person has concealed the particulars of his income, or has furnished inaccurate particulars of his income, in which case he may direct that such person shall pay, by way of penalty, the amount as specified therein. In the present case, there is no question of concealment of any particulars of the income of the petitioner-company. It is nowhere pointed out in the affidavit-in-reply as to which particulars are suppressed by the petitioner-company. In the petition itself, the petitioner has annexed a statement showing the computation of taxable income, and revenue for the previous year ending on September 30, 1987 (annexure "E"), and a statement showing the computation of total income and Income Tax payable for the previous year ending on March 31, 1988 (annexure "F"). The said statements are on the basis of the audited accounts of a public limited company. Nothing is stated in the affidavit-in-reply to point out that the said statements are, in any way, incorrect or that the petitioner has concealed any particulars. In any case, the question of concealment of particulars would arise only at the time of assessment, and not prior to that. Hence, if the penalty u/s 271(1)(c) is not taken into consideration, in the statement annexure A produced with the affidavit-in-reply, there would not be any loss of revenue, because the assessed tax would be Rs. 92,58,318 if the period is taken up to September 30, 1987, and it would be Rs. 1,12,75,081, if the assessment period is taken up to March 31, 1988.

It is also to be noted that the respondent has not taken into consideration the fact that the petitioner was required to change the assessment period prior (?) to the amendment in the Income Tax Act, viz., amendment to section 3 of the Act. Present section 3 was substituted with effect from April 1, 1989. Because of the said change in the section, the Central Board of Direct Taxes had issued a circular (see [1988] 171 ITR 220), dated 4th February, 1988, stating that with a view to avoid various problems which may arise in the transitional year, there may be assessees who may like to extend their previous year relevant to the assessment year 1988-89, to March 31, 1988 and that such request for change in the accounting year was to be liberally allowed by the assessing authorities, after taking into consideration that such adoption of a longer previous year does not result in any loss of revenue. In view of the aforesaid circular, the respondent was not required to consider whether previously the petitioner had applied for change in the period of accounting year, and whether such permission had been granted. In any case, the fact about the grant of any such permission in the earlier year would hardly be a ground for rejecting the request for permission to change the accounting year, on the basis of the circular issued by the Central Board of Direct Taxes, and that too, when there is an amendment to section 3 of the Income Tax Act, which provides that the "previous year" for the purpose of the Act means the financial year, immediately preceding the assessment year.

As stated above, as there is no loss of revenue because of the change in the accounting year, the petitioner is required to be allowed to change the period of accounting year to 18 months from October 1, 1986, to March 31, 1988. Accordingly, the impugned order annexure "G" passed by the respondent is required to be quashed and set aside.

In the result, the petition is allowed. The impugned order annexure G dated November 29, 1988, passed by the Deputy Commissioner of Income Tax (Assessment), Special Range 2, Baroda, is quashed and set side. The respondent is directed to allow the petitioner-company to change the period of its previous year from the period of October 1, 1986, to September 30, 1987, to the period of October 1, 1986, to March 31, 1988. Rule made absolute accordingly, with no order as to costs.