Southern Petrochemical Industries Corporation Ltd. vs Income Tax Officer

Prabha Sridevan, J.—The substantial questions of law raised in this appeal are:

(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of Section 144B of the IT Act, 1961 are attracted and the reference to the IAC was in accordance with the provisions of Section 144B?

(ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessment was not time-barred?

The assessee is engaged in the manufacture and marketing of fertilizers etc. The return of income for the asst. yr. 1980-81 was filed on 27th June, 1980 showing an income of Rs. 10,91,22,540 subject to disallowances and the claim u/s 80J of the IT Act, and after adjusting the carry forward business loss to the extent of Rs. 10,86,03,271 and the unabsorbed depreciation carried forward to the extent of Rs. 5,19,269, declared its total assessable income as ''nil''. Subsequently, on 11th Dec., 1980, it filed a revised return, again showing ''nil'' income, but the difference between the original return filed and the revised return filed on 11th Dec., 1980 related to withdrawal of depreciation claimed under various heads and by carrying forward the loss of the earlier years to a greater extent.

The Department proposed to pass a draft assessment order granting depreciation allowance which was not claimed by the appellant and referred the matter to the IAC u/s 144B(4) of the Act and by this procedure, took advantage of an extended time-limit for completion of the assessment order and it is thus that the assessment order was passed on 24th Aug, 1983. According to the assessee, for the asst. yr. 1980-81, the assessment should have been completed on or before 31st March, 1983 and the present assessment order passed on 24th Aug., 1983 is time-barred. The assessee''s case is that the action initiated by the AO u/s 144B(4) was without jurisdiction and contrary to law.

Learned Counsel for the appellant submitted that the income returned by the assessee was nil and the draft assessment proposed also showed nil income. According to the learned Counsel, when there is no variation in the income returned, Section 144B cannot be resorted to. Learned Counsel submitted that the AO had thrust upon the assessee a depreciation which it had not claimed and for this purpose, relied on Commissioner of Income Tax Vs. Mahendra Mills, . He also submitted that what Section 144B provides for is the power of the IAC to refer the matter when he proposes to make any variation in the income or loss returned which is prejudicial to the assessee, and unless there is such variation, his action is unsustainable. The variation must be in the income returned, which means the income in aggregate and variation not under separate heads of income. When that is so, the variation made by the officer in thrusting the depreciation cannot be equated to variation in the income returned. Learned Counsel relied on the following decisions:

(i) New India Investment Corporation Ltd. Vs. Income Tax Officer and Others, ;

(ii) Commissioner of Income Tax Vs. Aich Kay Farm, ;

(iii) Commissioner of Income Tax Vs. Gwalior Commercial Co. Ltd., .

Mrs. Pushya Sitaraman, learned senior standing counsel appearing for the Revenue, while conceding that depreciation cannot be thrust on any assessee would submit that at the time when the assessment order was passed and the proposal was made which is dt. 29th Aug. 1982, the law had not been settled and therefore, there is nothing wrong in the reference made u/s 144B and it was always subject to the IAC accepting the explanation given by the assessee. Therefore, at this stage, it was not necessary to quash the proceedings. She would also submit that by the draft assessment order proposed, the assessee would not be able to set off certain business losses which would have become time-barred and therefore, it was a variation that was prejudicial to the assessee. According to the learned senior standing counsel, this issue has been dealt with in detail by the CIT(A) and it did not deserve interference.

Section 144B of the IT Act, 1961 reads as follows:

144B. Approval of draft assessment order by Dy. CIT-This section, which was in force from the asst. yr. 1976-77 and was deleted by the Direct Tax Laws (Amendment) Act, 1987, is dealt with ante u/s 143, ''Assessment-Scope of the section'' and ''AO''.

The section applies where the AO proposes to make, before 1st Oct., 1984, any variation, adverse to the assessee, in the income or loss returned, and the amount of such variation exceeds the amount fixed by the Board. By an order dt. 23rd Dec, 1975, the Board fixed the amount at Rs. 1,00,000.

This is a procedural section; any procedural omission or irregularity would not render the assessment order a nullity. The draft assessment order need not be signed or dated. The section does not permit the AO to make more than one draft assessment order. The power of the Dy. CIT to issue directions to the AO under Sub-section (4) is confined only to ''the matters covered by the objections''; and therefore, the Dy. CIT has no power under this sub-section to enhance the proposed assessment. The omission of the assessee to forward his objections to the draft assessment order under this section does not deprive him of his right of appeal u/s 246. The provisions of this section are not applicable to assessment made u/s 147.

The period (not exceeding 180 days) from the date on which the AO forwards the draft assessment order under Sub-section (1) to the assessee upto the date on which the AO receives the directions of the Dy. CIT under Sub-section (4), or, in a case where no objections to the draft order are received from the assessee, a period of 30 days, has to be excluded in computing the time-limit for completion of an assessment or reassessment [deleted Expln. 1(iv) tos. 153].

[Note : The matter quoted above is not text of Section 144B but commentary from some publication on IT Act, 1961-Ed.]

It is an admitted fact that as per the revised return filed on 17th June, 1981, the total income returned was nil. It was computed in the following manner:

Business income 18,14,32,179

Less : Loss of earlier years carried forward and adjusted

1976-77 Rs. 5,46,877 1977-78 Rs. 6,98,30,113 1978-79 Rs. 11,10,55,189 18,14,32,179 -------------- Balance business income Nil

Income from HP & OS 12,14,321 Less : Unabsorbed depreciation for 1976-77 adjusted 12,14,321 -------------- Balance income Nil Total income admitted Nil

Though the appellant had claimed depreciation in the original return, in the revised return filed, it had withdrawn the claim for depreciation in order to enjoy the benefit of set off of carry forward business losses of the earlier years, development rebate, etc. The ITO thrust the depreciation and besides making admission, finally computed the income "for the year at nil as given below":

Business Income (after allowing depreciation) Rs. 11,11,05,812

Less : Set off losses relating to

1974-75 1,30,748 1975-76 4,63,891 1976-77 1,52,82,822 1977-78 9,52,28,351 11,11,05,812 -------------- -------------- Balance business income : Nil

Income from HP & OS 9,02,339

Less : Unabsorbed depreciation 1976-77 9,02,339

Balance income Nil

Total assessed income Nil

Therefore, it is undisputed that the income returned as per the assessee''s revised return and as per the draft return (sic-assessment) proposed by the ITO was both nil. The CIT(A) had recorded that the decrease of seven crores in the annual business income is mainly due to the fact that the ITO had thrust the allowance of depreciation. The action of the ITO was found to be against the spirit of the instructions of the Board circular, which provided that when no claim for depreciation had been made, no depreciation should be allowed by the ITO. Therefore, the CIT(A) held that this allowance of some deduction cannot be said to be prejudicial to the assessee. After referring to New India Investment Corporation Ltd. v. ITO (supra), he held that the invoking of the provision of Section 144B was bad and the assessment had been completed beyond the time-limit prescribed under the Act. Against this, the Department filed an appeal. There was a difference between the views of two Members of the Board (sic-Tribunal) who formed the Tribunal and therefore, a Special Bench (sic-Third Member) was constituted to go into this question and accordingly, the Special Bench considered the matter. The Special Bench held that the revised return was a valid return and the Special Bench also held that depreciation being an allowance and the option being with the assessee to claim or not to claim it, it could not be imposed on the assessee. When that is so, with regard to the variation that is proposed, the Tribunal merely observed that the allowing of the depreciation that was withdrawn by the assessee is sufficient to prejudice the assessee. Because these additions exceeded rupees one lakh, complying with the provisions of Section 144B was justified. It is against this the present appeal has been filed. On this ground alone, the assessee''s appeal must be allowed.

Actually, the Mahendra Mills case (supra) answers the question in favour of the assessee. The Special Bench which was constituted to answer the question held that the revised return of income is a valid return within the meaning of Section 139(5). It also held that the AO was not justified in allowing deduction of depreciation that was withdrawn by the revised return. But however, it upheld the action on the ground that the allowing of depreciation that was withdrawn was sufficient to prejudice the assessee and therefore, the provisions of Section 144B were justified. This is how the Special Bench answered the reference. The Tribunal, on receiving the order of the Special Bench, on the questions (a) whether the revised return was valid and (b) whether the ITO was justified in allowing the depreciation, though not claimed, decided these questions in conformity with the decisions of the Special Bench. With regard to the other points on which there was no difference of opinion, the original order was upheld. Therefore, in this case, the finding that the revised return was a valid return and allowing of depreciation which was not claimed was not justified cannot be agitated. Those findings have become final. The only question is with regard to the justifiability of invocation of Section 144B.

In Mahendra Mills'' case (supra), the Supreme Court has considered the views of various High Courts on this issue of allowance of depreciation. We will refer to some of the extracts:

(a) In Beco Engineering Co. Ltd. Vs. Commissioner of Income Tax, , the assessee claimed depreciation in its original return. Later he filed a revised return in which he withdrew the claim for depreciation. The ITO was of the view that it was statutorily binding upon him to compute the total income which must take into consideration the deduction of depreciation allowance. The High Court held that in case the assessee had not claimed depreciation allowance he could not be granted the same by the ITO. In regard to the revised return the High Court took the view that the original return could not be adverted to.

This was approved.

(b) In Commissioner of Income Tax Vs. Friends Corporation, , it was held that there is no gainsaying that allowance for depreciation is a benefit available to the assessee to claim, but not one that can be thrust upon him against his wishes. At any rate, in order to claim depreciation, the assessee must furnish the requisite particulars described by the IT Act and the rules made thereunder. In the absence of such particulars, the assessee cannot avail of, nor indeed can be held entitled to, depreciation. It would be pertinent in this behalf to advert to the judgment of this Court in Beco Engineering Co. Ltd. v. CIT (supra) where a reference was made to Circular No. 29D(XIX-14) of 1965, dt. 31st Aug., 1965, issued by the CBDT which provides that where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the ITO should estimate the income without allowing depreciation allowance. Further, it was held that from the language of Sections 32(1)(ii) and 34(1) read with the circular, it was clear that in case an assessee had not claimed depreciation, the ITO could not give him depreciation allowance.

This was also approved.

(c) Similarly, in Commissioner of Income Tax Vs. Arun Textile "C", , it was held that the provisions of Section 32 are intended to give benefit to the assessee for claiming deductions in respect of depreciation on the type of assets mentioned therein. Furthermore, a mere claim to deduction would not be enough since the deductions are to be allowed subject to the provisions of Section 34 which required necessary particulars to be furnished in the prescribed form. Therefore, until a claim is made for allowing deductions of the nature covered u/s 32 along with necessary particulars, there would hardly be any occasion for the ITO to ''allow'' any claim. In the context in which the word ''allowed'' is used in Section 32(1), it is clear to us that the meaning intended is to admit something claimed''. The word ''allowed'' means to accept as true or valid, to acknowledge, admit, grant, to admit something claimed, to acknowledge, grant, concede'' (see the Oxford English Dictionary, Vol. I, 1970 reprint, p. 2392). There is nothing in the provisions of Section 32(1) r/w Section 29 of the Act to indicate that even when no claim is made for allowing deduction in respect of the depreciation under. Section 32(1), the ITO is bound to allow a deduction. In our view, it is implicit in the said provisions that the assessee should have made a claim for deduction under the said provisions to enable the ITO to consider the same.

It is difficult to accept this argument for, under the scheme of the Act. income is to be charged regardless of depreciation on the value of the assets and it is only by way of an exception that Section 32(1) grants an allowance in respect of depreciation on the value of the capital assets enumerated therein. It may appear intriguing on the part of the assessee as to why it does not claim the benefit of deduction from its taxable income, but the choice is clearly its. Where the assessee does not want the benefit, it cannot be thrust upon it. There is no provision which makes it compulsory on the part of the ITO to make deductions in all cases. If it were incumbent on the ITO to make compulsory deductions irrespective of whether the assessee claimed or not, the statutory requirement of making the claim along with necessary particulars and the provision for ''allowing'' it would be unnecessary.

This was also confirmed.

Similarly, the decision in Chief Commissioner of Income Tax (Administration) Vs. Machine Tool Corporation of India Ltd., , was also approved where the Karnataka High Court had held that it was not open to the ITO to advert to the original return or statement filed along with it for the purpose of allowing deductions after such claim was expressly withdrawn under the revised return. Again, the Supreme Court approved of Commissioner of Income Tax Vs. Andhra Cotton Mills Ltd., where the Andhra Pradesh High Court, after referring to the circular of the Central Board of Revenue of the year 1965 and Section 34(1) of the Act, held that the ITO could not have allowed the deduction towards depreciation. They overruled the decision of this Court in Commissioner of Income Tax Vs. Southern Petro Chemical Industries Corporation Ltd. (No. 2), where this Court held that once the particulars relating to the grant of depreciation are available, it is open to the ITO to grant depreciation even if the assessee had withdrawn the claim in the revised return and in para 42 of the judgment, the Supreme Court held as follows:

We get support from the earlier decision of this Court in Commissioner of Income Tax, Bombay City I Vs. Dharampur Leather Co. Ltd., . Allowance of depreciation is calculated on the WDV of the assets, which WDV would be the actual cost of acquisition less the aggregate of all deductions ''actually allowed'' to the assessee for the past years. ''Actually allowed'' does not mean ''notionally allowed''. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is ''allowed'' when it is claimed. A subtle distinction is there when we examine the language used in Section 16 and that in Sections 34 and 37 of the Act. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation.

From the above, it is clear that when depreciation is not claimed, it cannot be ''allowed''. When the original return is withdrawn and revised return is filed, there is no basis on which depreciation can be taken note of. So, the taxation is the consequence of imposition of depreciation, which is not permissible. So, he cannot take advantage of something that he cannot do and then say that since this is prejudicial to the assessee, he will take advantage of the extended period of limitation. Any variation which is illegal or impermissible will cause prejudice per se. No one can take advantage of one''s own illegal act or an act which is not legally sustainable. For this, we do not think we need authorities. Therefore, on this score alone, the invocation of Section 144B is impermissible.

Further, if the Parliament intended that imposition of any variation which is prejudicial to the assessee gave the ITO the power to invoke the provisions of Section 144B, then it need not have included the words "in the income or loss returned". It would have been sufficient to merely say "any variation which is prejudicial to the assessee".

We will also look at it from another perspective, whether the words "income or loss returned" refer to the total income and total loss returned or whether it is variation in specific heads of income.

In V. C. GUPTA Vs. COMMISSIONER OF Income Tax., , the assessee was a HUF. It filed a return and the ITO forwarded a draft order for approval u/s 144B. There, the assessee contended that for invoking the provisions of Section 144B, the variation in the individual heads of income should exceed rupees one lakh. This was held to be devoid of merit. The Madhya Pradesh High Court held that in order to attract the provisions of Section 144B, "all that was necessary in the case was that an amount of variation or loss returned should have exceeded rupees one lakh". Therefore, the individual heads of income do not arise for consideration, nor any variation in the same. What is relevant is whether the total income or loss returned is varied and whether that variation is prejudicial to the assessee.

The Act requires that every person, whose total income exceeds the maximum amount which is not chargeable to Income Tax, shall furnish a return of his income in the manner prescribed and so forth. Therefore, the Madhya Pradesh High Court held that the return "ultimately relates to and has to show the total income or loss of the assessee. The different heads are required to be shown only for the purpose of computation. u/s 144B the expression ''the income or loss returned'' refers to the total income or loss as shown in the return of the assessee and not to the amounts shown under the different heads of income." It also held, "therefore, only if the variation in such total income or loss exceeds the limit prescribed by the Board (viz., 1 lakh), Section 144B will come into operation and not otherwise. The said section does not refer to the various heads and cannot be invoked if, in the calculation, a variation over the prescribed limit occurs."

In Commissioner of Income Tax Vs. Aich Kay Farm, , it was held as follows:

In the return of income filed by the assessee, the total income was declared at Rs. 1,23,830. The assessment was made on total income of Rs. 1,36,829 inclusive of the agricultural income of Rs. 25,000. With regard to the particulars of the agricultural income there might be a variation exceeding Rs. 1,00,000. But, in order to attract the provisions of Section 144B, it was necessary that the variation in the income or loss returned should exceed the amount fixed by the Board, namely, Rs. 1 lakh. The Tribunal was, therefore justified in holding that the provisions of Section 144B were not attracted and hence the extended period of limitation provided by Clause (iv) of Expln. 1 to Section 153 was not applicable. As the assessment was not completed before the expiry of one year from the date of filing of the return, the Tribunal was right in holding that the order of assessment passed on 23rd Aug., 1978, was barred by limitation in view of the provisions of Clause (c) of Sub-section (1) of Section 153.

The reasoning of the Madhya Pradesh High Court appears to be the right one. If so, there is no variation in the two returns, viz., the assessee''s revised return and the ITO''s proposed return. Both showed ''nil'' and therefore, viewed at from any angle, Section 144B could not have been invoked.

For all these reasons, the order of the Tribunal, Madras ''C'' Bench, dt. 29th April, 2002 passed in ITA No. 2668 of 1984 is set aside and the tax case appeal is allowed.