STEEL and INDUSTRIAL FORGINGS LTD. vs DY. Commissioner of Income Tax

G. Sivarajan, J.

The matter arises under the Income Tax Act, 1961 (hereinafter referred to as the ''the Act'').

M/S. Steel and Industrial Forgings Ltd., Athani a Government of Kerala undertaking carrying on the business of manufacture and sale of forgings is the appellant. It is aggrieved by the order of the Income Tax Appellate Tribunal, Cochin Bench (hereinafter referred to as the ''the Tribunal'') in I.T.A. No. 75/Cochd 1993. The assessment year is 1991-92, the relevant accounting period ended 31-3-1991.

For the assessment year 1991-92 the assessee filed a return on 27-12-1991 disclosing a total income/loss of Rs. 2,74,33,870. The assessing officer processed the same under section 143(1)(a) of the Act and sent an intimation dated 17-1-1992 (Annexure A). In the said intimation the assessing officer had made a prima facie adjustment and brought down the loss to Rs. 2,48,40,672. The assessing officer also levied additional tax of Rs. 2,38,574 under section 143(1A) of the Act. The details of the adjustment are given in the explanatory sheet. The enclosed statement shows that the assessee had claimed depreciation on block assets of'' Rs. 1,35,95,225 whereas the admissible deduction was only 75 per cent of the normal depreciation of Rs. 1,10,02,023 for the year 1991-92. Thus the excess claim of depreciation came to Rs. 25,93,202. It is in view of the above that additional tax is levied under section 143(1A). The fact that by virtue of the amendment made to the provisions regarding depreciation the assessee is entitled to get a deduction of only 75 per cent of the normal depreciation for the year 1991-92 is not in dispute. The assessee had claimed normal depreciation without noticing the amendment in the return is also not in dispute.

Being aggrieved by the levy of additional tax under section 143(1A) the appellant filed an application dated 20-2-1992 under section 154 of the Act for rectification of the intimation (Annexure C) in the light of the decision of the Delhi High Court in Modi Cement Ltd. v. Union of India (1992) 193 ITR 91 . Since the said application was rejected, the appellant filed appeal before the Commissioner (Appeals), Calicut. The Appellate Authority cancelled the levy of additional tax made under section 143(1A) by his order dated 30-10-1992 (Annexure D). The department filed appeal before the Tribunal. The appellant also filed cross objection. The Tribunal following the decisions of this court in Kerala State Coir Corporation Ltd. Vs. Union of India (UOI) and Others, and in Aluminium Industries Ltd. Vs. Deputy Commissioner of Income Tax (Assessment) and Another, which held that the provision for levy of additional Income Tax even where the net result of the prima facie adjustment is a loss is intended to prevent evasion of tax and levy of additional tax does not violate the Constitution, set aside the order of the first appellate authority and restored the order of the assessing officer levying additional Income Tax. It is against this order of the Tribunal the appellant has filed this appeal.

This court while admitting the appeal which ordered notice on the following questions of law.

"1. Whether on the facts and circumstances of the case, additional tax under section 143(1A) was leviable especially since the levy has been made with respect to redetermination of depreciation governed by the provisions of section 32(2) of the Act?"

Whether additional tax under section 143(1A) was attracted having regard to the retrospective amendment to section 143(1A) of the Act?"

Sri. Sarangan, learned senior counsel along with Sri. Vinod Chandran appearing for the appellant submits that the decisions rendered by this court in Kerala State Coir Corpn. Ltd.''s case (supra) and in Aluminium Industries Ltd.''s case (supra) are cases of loss returns where even after the prima facie adjustments made under section 143(1)(a) was a loss and this court was concerned with validity of the amended provisions of section 143(1A) made by the Finance Act, 1993 with retrospective effect from 1-4-1989. The senior counsel submitted that it is in the above context this court held that the provisions for levy of additional tax even where the net result is a loss after carrying out adjustment is intended to prevent evasion of tax and the amendment of section 143(1A) levying additional tax with retrospective effect from 1-4-1989 does not violate articles 14 and 265 of'' the Constitution. The senior counsel, however, submits that those two decisions have no application to the facts of the present case where the levy of additional tax under section 143(1A) was not on account of any reduction in the loss as a result of the prima facie adjustment made under section 143(1)(a) of the Act. The senior counsel submitted that, as already observed by this court in the above mentioned two cases, section 143(1A) was inserted only to prevent evasion of tax and therefore the additional tax under the said section can be levied only where as a result of the prima facie adjustment the tax liability has been increased. The senior counsel submits that under the scheme of the Act loss and depreciation are dealt with separately and they are mutually exclusive. The senior counsel, in support of the above contention, has referred to the provisions of sections 32(2), 32A(3), 72, 79 and section 80 and submitted that all through depreciation and loss are dealt with separately. The senior counsel also submitted that section 143(1A) is not attracted to a case where the prima facie adjustment is made in respect of depreciation claimed. The senior counsel submitted that in view of the provisions of section 32(2) of the Act depreciation does not go to enhance the loss because unless there is business income there is no question of adjusting the depreciation in the computation of total income. The senior counsel also relied on a decision of the Karnataka High Court in Brahmavar Chemicals Pvt. Ltd. Vs. Commissioner of Income Tax and Another, .

Sri. P.K.R. Menon, learned senior Central Government standing counsel for taxes appearing for the respondent, on the other hand, submitted that income will take in both positive as well as negative figure or in other words income includes loss. He in support of the above relied on the decision of the Supreme Court in Commissioner of Income Tax (Central), Delhi Vs. Harprasad and Co. P. Ltd., . He had further relied on the decision in CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga (1933) 1 ITR 94 and submitted that the return filed by the assessee has to be accepted subject to prima facie adjustments to be made by the assessing officer. The senior standing counsel further relied on the two decisions of this court mentioned earlier and submitted that the question is covered by the said decisions and also by the decision of the Supreme Court in Assistant Commissioner of Income Tax Vs. J.K. Synthetics Ltd., .

We have considered the rival submissions. The intimation under section 143(1)(a)-Annexure A shows that the appellant had filed the return as a loss return. It further shows that the adjustment is made only in respect of the depreciation claimed. By virtue of the amendment made to section 32, for the assessment year 1991-92 the appellant was entitled to claim deduction of only 75 per cent of the normal depreciation and the appellant without considering the amendment claimed full depreciation in the return. Thus the assessing officer was entitled to make prima facie adjustment by bringing down the claim to 75% of the amount claimed in the return. As such there is no illegality in the adjustment.

The contention of the appellant is that section 143(1A) is not attracted in this case and to that extent the intimation demanding additional tax is bad. Let us examine the correctness of the said contention.

Section 143(1A) of the Act as it originally stood, the relevant portion reads :

"(1A)(a) Where, in the case of any person, the total income, as a result of the adjustments made under the first proviso to clause (a) of sub-section (1), exceeds the total income declared in the return by any amount, the assessing officer shall,

(i) further increase the amount of tax payable under sub-section (1) by an additional Income Tax calculated at the rate of twenty pet, cent of the tax payable on such excess amount and specify the additional Income Tax in the intimation to be sent under sub-clause (i) of clause (a) of sub-section (1);"

Section 143(1A) as amended by the Finance Act, 1993 with effect from 1-4-1989, i.e., the date of insertion of section 143(1A) relevant portion reads :

"(1A)(a) Where as a result of the adjustments made under the first proviso to clause (a) of sub-section (1),

(i) the income declared by any person in the return is increased; or

(ii) the loss declared by such person in the return is reduced or is converted into income, the assessing officer shall,

(A) in a case where the increase in income under sub-clause (i) of this clause has increased the total income of such person, further increase the amount of tax payable under sub-section (1) by an additional Income Tax calculated at the rate of twenty per cent on the difference between the tax on the total income so increased and the tax that would have been chargeable had such total income been reduced by the amount of adjustments and specify the additional Income Tax in the intimation to be sent under sub-clause (i) of clause (a) of sub-section (1);

(B) in a case where the loss so declared is reduced under sub-clause (ii) of this clause or the aforesaid adjustments have the effect of converting that loss into income, calculate a sum (hereinafter referred to as additional income-tax) equal to twenty per cent of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person and specify the additional Income Tax so calculated in the intimation to be sent under sub-clause (i) of clause (a) of subsection (1)."

It is evident from the provisions of section 143(1A) as it stood before the amendment that the said provision is attracted only if the total income as a result of the adjustment made under the first proviso to section 143(1)(a) exceeds the total income declared in the return. However, after the amendment of section 143(1A) either there must have increase in the income disclosed by such person in the return or the loss declared by such person in the return is reduced or is converted to income. It is only in such a case the question of levy of additional Income Tax arises. However, it would appear from a reading of the provisions of section 143(1A) both before and after the amendment, it occurs to us that in order to attract sub-clause (ii) of section 143(1A)(a) as amended the adjustment must affect the total income returned, be it a case of income or loss.

The intimation, as already noted, shows that the return filed by the appellant was a loss return of Rs. 2,74,33,870 and after adjustment the loss so returned came down to Rs. 2,48,40,672 and consequently it would appear that the loss is reduced attracting the sub-clause (ii) of section 143(1A)(a). In that case the amended provisions will apply. To that effect is the decision of this court in the two decisions mentioned earlier. However, it must be noted that the adjustment made is only in respect of depreciation and not loss. Senior counsel submits that loss and depreciation are different concepts and provisions regarding deduction of depreciation and loss are also different. The senior counsel also relied on the provisions of section 32(2) of the Act and submitted that the deduction of depreciation in the computation of total income arises only in a case where there is income by way of profit and since there is no positive income during the previous year relevant to the assessment year there is no question of depreciation entering in the computation of total income and consequently there is no question of evasion of tax which is the very basis for introduction of section 143(1A). The senior counsel also brought to our notice that in the assessment order (Annexure B) passed under section 143 of the Act the assessing officer has treated loss and depreciation separately.

As already noted the appellant had contended before the assessing officer that a loss return even after adjustment results in loss will not attract the provisions of section 143(1A). The decision of the Delhi High Court in Modi Cements Ltd.''s case (supra) supported the above stand. However, the amendment to section 143(1A) made by the Finance Act, 1993 with retrospective effect from 1-4-1989 got over the said decision and as per the said Amendment Act additional tax can be levied even in such cases. The Supreme Court had further reversed the decision of the Delhi High Court in J.K Synthetics Ltd.s case (supra). Even earlier this court upheld the validity of the amendment made to section 143(1A) in the two decisions already mentioned. It is in the above background the assessee had taken the contention that the present is not a case of reducing the loss as a result of the prima facie adjustment and that the reduction in the depreciation claimed does not have the, effect of affecting the total income declared. The Tribunal, as we already noted, has allowed the appeal filed by the department restoring the order of the assessing officer on the basis of the two decisions of this court upholding the validity of the amended provisions of section 143(1A) of the Act. Having regard to the submissions made by the senior counsel appearing for the appellant we feel that an opportunity must be given to the appellant to agitate the question of liability to additional tax under section 143(1A) on the lines argued by the appellant before us. For the said purpose we set aside the orders of the two appellate authorities on this question and direct the assessing officer to consider the said question afresh and to take a decision in accordance with law. It is open to the appellant to file a detailed statement putting forward its claim. The assessing officer will consider the same in the light of the provisions of the Act and in the light of the observations contained in this judgment and pass orders after affording a personal hearing also to the appellant.

This appeal is disposed of as above.