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Judgment
Pinaki Chandra Ghose, J.—The instant appeal u/s 260A of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') for the Assessment year 1989-90 was admitted for hearing on the following questions of law:
1) Whether disallowance u/s 143(1)(a) of the Income Tax Act, 1961 can be made merely because proof in support of a claim made in the return is not annexed to the return?
2) Whether the Tribunal was justified in holding that the disallowance made by the Assessing Officer falls within the purview of prima facie adjustment within the meaning of section 143(1)(a) and its purported finding in this behalf are arbitrary, unreasonable and perverse?
The facts of the case briefly are as follows:
(a) The assessee filed its returns for the Assessment year 1989-90 along with the tax audit report u/s 44AB of the Act. In the computation of income, the assessee claimed deduction of Rs.21,12,766/- u/s 80G, being 50% of the donation amount of Rs.42,25,533/-. Serial No.7 of the tax audit report filed with the return reads as follows:
"7. Any tax, duty or other sum.
i) Debited to the profit and loss account Rs.1,66,20,857.02
but not paid during the previous year.
ii) paid during the previous year but Rs.1,22,21,679.88
allowed as a deduction in any earlier
year-section 43B"
(b) In respect of the said return, an intimation u/s 143(1)(a) of the Act was issued by the Assessing Officer on 6th August, 1990. In the said intimation, the Assessing Officer made, inter alia, the following adjustments:
i) Disallowance u/s 43B as per
Tax Audit Report - Rs.1,66,20,887.00
ii) Donation debited to profit and loss account
disallowed for want of any receipt and also for
want any valid certificate for tax exemption
certificate filed Rs. 42,25,532.00
As a result of the aforesaid adjustments, the assessee was made liable for payment of additional tax over and above the normal tax.
At the material time, the Act did not provide for any appeal against the intimation u/s 143(1)(a) of the Act. On 15th March, 1991 the assessee made an application u/s 154 of the Act objecting the said adjustments. The assessee furnished, inter alia, break up of the sum of Rs.1,66,20,857/�mentioned in the Tax Audit Report comprising Commission to Directors (Rs.1,26,773/-) and Bonus (Rs.1,50,00,000/-) both falling under Clause (c) of section 43B and Provident Fund contribution (Rs.14,94,084/-) falling under Clause (b) of section 43B and submitted evidence in support of its claim for allowing ability of the said amounts.
The Assessing Officer by an order dated 28th February, 1992 u/s 143(1)(a)/154, out of Rs.1,66,20,857/- allowed a sum of Rs.1,51,47,884/� comprising Commission to Directors (Rs.1,26,773/-), Bonus (Rs.1,35,48,969/-) and Provident Fund contribution (Rs.14,72,142/-). The disallowance u/s 43B was retained to the extent of Rs.14,72,973/- comprising Bonus (Rs.14,51,031/-) and Provident Fund contribution (Rs.21,942/-). The Assessing Officer also allowed a portion of the assessee''s claim for deduction u/s 80G.
The assessee preferred an appeal against the said order dated 28th February, 1992 questioning, inter alia, the jurisdiction of the Assessing Officer to make the adjustments in the intimation dated 6th August, 1990. On 20th March, 1992 the assessee made another application u/s 154 in respect of which the Assessing Officer passed an order on the same day partly increasing the deduction allowed u/s 80G.
The assessee, thereafter, preferred another appeal against another order dated 20th March, 1992 again raising, inter alia, the question of jurisdiction of the Assessing Officer to make the adjustments in the intimation dated 6th August, 1990. A third rectification order u/s 154 was passed by the Assessing Officer on 20th July, 1992 against which the assessee also preferred an appeal before the Commissioner of Income Tax (Appeals).
All the said three appeals were decided by the Commissioner of Income Tax (Appeals) by a consolidated order dated 28th December, 1994. The Commissioner of Income Tax (Appeals) held that no adjustment u/s 143(1)(a) could be made either with reference to section 43B or section 80G because of non�submission of evidence with the return. It was also held that the Tax Audit Report did not state that the sum of Rs.1,66,20,857/- was inadmissible u/s 43B. The Commissioner of Income Tax (Appeals) thus, allowed the assessee''s appeals on the said two issues.
FMA 834 of 2008 : Prodyut Kumar Mukherjee @ P.K. Mukherjee
+ v.
FMA 233 of 2009 SAIL & Others
+
(4 P. B.)
COTT 3 of 2008 : Assistant Commissioner of Commercial Taxes
+ v.
COTT 4 of 2008 National Hydroelectric power development
Corporation Limited
+
COTT 5 of 2008
Against parting heard said order of the Commissioner of Income Tax (Appeals), the Revenue Officer preferred an appeal before the Tribunal objecting to the deletion of adjustment of Rs.14, 2,973/- u/s 43B as also the adjustment with reference to section 80G. The Tribunal accepted the assessee''s contention that no prima facie adjustment could be made u/s 143(1)(a) on the ground that proof in support of a claim was not submitted with the return. The Tribunal, thus, deleted the adjustment made with reference to section 80G. However, the Tribunal upheld the adjustment made u/s 43B on the ground that it was based on the observation made by the Tax Auditor in the Tax Audit Report.
Mr. J.P. Khaitan, learned Advocate, appearing on behalf of the appellant, submitted that section 143 as in force at the material time provided for issue of an intimation under sub-section (1) without any notice or hearing to the assessee. He further submitted that sub-section (2) provided for issue of notice and sub-section (3) provided for assessment after such notice and hearing. The proviso to sub�section(1) empowered the Assessing Officer to make in the intimation, inter alia, the following adjustment in the income or loss declared in the return is follows:
(iii) 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, shall be disallowed.
He further submitted that the scope of the power of the Assessing Officer to make prima facie adjustment in terms of the proviso to section 143(1)(a) has been considered by this Hon''ble Court and also by other High Courts in several cases. The said power to make prima facie adjustment has been equated with the power u/s 154 to rectify a mistake apparent from the record not involving any doubt, debate or factual investigation/enquiry. It has been held that no prima facie adjustment can be made merely because evidence in support of a claim made in the return was not enclosed with the return or where an enquiry on facts was necessary.
He also contended that in Circular No. 581 dated 28th September, 1990 [ (1990) 186 ITR 2] issued by the Central Board of Direct Taxes, the scope of the power to make prima facie adjustment u/s 143(1)(a) was somewhat co-terminus with the power to rectify a mistake apparent from the record u/s 154. In the case of Khatau Junkar Ltd. and another Vs. K.S. Pathania and another, , it was held by the Hon''ble Bombay High Court that prima facie adjustment could be made only where on the face of the return and the documents and accounts accompanying it, the deduction claimed was inadmissible. If any further enquiry was necessary or if the Income Tax Officer felt that further proof was required in connection with the claim for deduction, he would have to issue a notice u/s 143(2) of the Act.
In the case of SRF Charitable Trust v. Union of India & Ors., reported in (1992) 193 ITR 95 (Delhi), the Hon''ble Delhi High Court at pages 98-99 of the Reports held as follows:
... ... ... The conclusion that the claim of the assessee is inadmissible must, in other words, flow from the return as filed. No power is given to the Income Tax Officer to disallow a claim for the reason that there is no proof in support of the claim made by the assessee. In a way, the said clause (iii) of the proviso is analogous to section 154 of the Act. Where it is evident from the return as filed, along with the documents in support thereof, that a claim of the assesee is inadmissible, only then an adjustment under the said proviso can be made. If proof in support of the claim is not furnished by an assessee, then for the lack of proof, no disallowance or an adjustment can be made. The only option which is open to the Income Tax Officer, in such a case, is that he can require the assessee to furnish proof in which case he will presumably have to issue notice u/s 143(2) ... ... ...
The said circular and decisions of the Hon''ble Bombay High Court and Delhi High Court were considered by a learned single Judge of this Hon''ble Court in Modern Fibotex India Ltd. and Another Vs. Deputy Commissioner of Income Tax and Others, . At pages 507-508 of the Reports, the learned single Judge agreed with the view taken by the Hon''ble Bombay High Court and Delhi High Court. At page 509 of the Reports, it was held as follows:
The exercise of power u/s 143(1)(a) is, therefore, required to be scrutinised carefully and kept strictly within the bounds of the statute, any dispute being resolved in favour of the assessee.
He also submitted that Appeal against the said judgment of the learned single Judge in APO No.383 of 1995 in Modern Fibotex India Ltd. (supra) was dismissed by the Division Bench of this Hon''ble Court on 23rd November, 2000.
Section 43B of the Act in its opening part provides for deduction of, inter alia, any Provident Fund contribution falling under Clause (b) and bonus falling under Clause (c) only in the year of actual payment. However, by reason of the first proviso, deduction is also allowed in respect of bonus falling under Clause (c) paid after the close of the previous year, that is, in the next accounting year, but on or before the due date for filing the Income Tax Return in respect of the previous year, evidence of such payment having been furnished along with the return. ( Allied Motors (P.) Ltd. Vs. Commissioner of Income Tax, Delhi, . The second proviso applicable in respect of Provident Fund contribution falling under clause (b) provides for deduction only if payment has actually been made on or before the due date as per the Provident Fund law. Before making any disallowance u/s 43B, the Assessing Officer is required to examine the applicability of the two provisos to the amounts in question. A disallowance u/s 43B cannot be made simply because payment was not made within the previous year itself.
He further submitted that against Serial No.7(i) of the Tax Audit Report, the amount debited to the profit and loss account but not paid during the previous year was required to be specified. The said Serial No.7(i) did not require the Tax Auditor to specify the amount which was inadmissible u/s 43B. There was no requirement to furnish any break up of the respective amounts with reference to the different clauses of section 43B or to state as to whether the same or any part thereof had been paid before the due date for filing the Income Tax Return or as to whether the amount specified included any Provident Fund contribution and if so, whether such contribution had been actually paid on or before the due date prescribed under the Provident Fund law. Without such break up, information and evidence it was impossible to determine the allowability or disallowability u/s 43B of the Act specified by the Tax Auditor.
It was further submitted that in the instant case, the information contained in the Tax Audit Report against Serial No.7(i) did not enable the Assessing Officer to make any prima facie adjustment u/s 143(1)(a) with reference to the provisions of section 43B. As required by the prescribed form of the Tax Audit Report, the Tax Auditor merely specified the amount debited to the profit and loss account but not paid within the previous year. The aggregate amount mentioned in the Tax Audit Report was made up of three amounts - two of which (bonus and commission) were covered by clause (c) of section 43B in respect of which the first proviso was relevant and the Provident Fund contribution was covered by Clause (b) in respect of which the second proviso was relevant. The Tax Audit Report did not contain any break-up of the amount or the further information required in the light of the two provisos to section 43B. The Tax Auditor did not specify in the Tax Audit Report the amount inadmissible u/s 43B. The Assessing Officer had to make further enquiry and examine further facts and documents by calling for break-up of the amount specified in the Tax Audit with reference to the different clauses of section 43B and further details, information and documents with reference to the two provisos for the purpose of deciding whether any disallowance could be made u/s 43B. The Assessing Officer was, therefore, required to issue a notice u/s 143(2) for the purpose of making an assessment u/s 143(3). The instant case does not fall within the purview of the proviso to section 143(1)(a) at all. The Assessing Officer could not have disallowed the amount specified in the Tax Audit Report u/s 43B or made any prima facie adjustment under the proviso to section 143(1)(a).
He relied on Jagatdal Jute and Industries Ltd. Vs. Commissioner of Income Tax and Another, In this case the Hon''ble Court considered the question as to whether the power u/s 154 to rectify a mistake apparent from the record could be exercised to make a disallowance u/s 43B on the basis of the information contained in the Tax Audit Report. At pages 593-594 of the Reports, it was held by this Hon''ble Court that for making a disallowance u/s 43B, further enquiry was necessary and the power u/s 154 could not be exercised merely on the basis of the information contained in the Tax Audit Report without holding such enquiry. The principle laid down by this Hon''ble Court in Jagatdal Jute''s case (supra) with reference to the power of rectification u/s 154 is equally applicable for deciding the scope of the power to make prima facie adjustment u/s 143(1)(a). The power u/s 143(1)(a) to make a prima facie adjustment has been equated with the power to rectify a mistake apparent from the record u/s 154, which cannot be done u/s 154 and section 143(1)(a) of the Act.
He further relied on the decision in the case of G.K.W. Ltd. Vs. Commissioner of Income Tax, . It was held by this Court that when the Assessing Officer proposed to differ with the disclosure made in the return, an opportunity of hearing to the assessee was required by service of notice u/s 143(2) and the matter could be gone into u/s 143(3) and not as a prima facie adjustment u/s 143(1)(a) of the Act.
He contended that no doubt the first proviso to section 43B required the evidence of payment to be furnished along with the return. However, as submitted hereinbefore, no prima facie adjustment could be made simply because of want of such evidence with the return. In this context he relied on the decision in the case of Commissioner of Income Tax Vs. Berger Paints (India) Ltd. (No. 2), In that case, the Court in considering the effect of the provisions of subsection (5) of section 32A and sub-section (4) of section 80HHC which required reports of the accountant to be furnished along with the return of income. It was held that the said requirement was directory and not mandatory and the report could be submitted even subsequent to filing of the return. In fact, in the instant case, the Assessing Officer himself considered the requirement of furnishing the evidence of payment with the return as directory. No evidence as regards payment was furnished by the assessee with the return. However, the Assessing Officer accepted such evidence subsequently furnished by the assessee by way of rectification application and on the basis thereof deleted the disallowance to the extent of Rs.1,51,47,884/- out of Rs.1,66,20,857/-. If the Assessing Officer had considered the requirement of furnishing the evidence of payment with the return as mandatory, he would not have accepted such evidence subsequently furnished by the assessee in rectification proceedings.
He also contended that it is pertinent to mention here that the prescribed form of the Tax Audit Report was substituted much later on June 4, 1999. In the substituted form against serial No.21, full details were required to be mentioned with reference to each of the clauses of section 43B. The information required to be furnished also covered the requirements of the two provisos. It was only after the prescribed form of the Tax Audit Report which was substituted with effect from 4th June, 1999 that the information contained in the report itself became sufficient for the Assessing Officer to decide on the allowability or disallowability of a particular amount u/s 43B. However, the instant case relates to the Assessment year 1989-90 when the prescribed form of the Tax Audit Report did not require specification of the requisite details which could have enabled the Assessing Officer to make a prima facie adjustment under the proviso to section 143(1)(a) of the Act.
On the contrary, Mr. M.P. Agarwal, learned advocate, appearing on behalf of the Revenue relied on the decision in the case of Commissioner of Income Tax Vs. Sitaram Textiles Ltd., . In the said case the Court was concerned with Clause (d) of section 43B which also finds mention in the first proviso. The facts in that case are clearly distinguishable. There the amount specified in the Tax Audit Report only represented interest falling within Clause (d) of section 43B, unlike the instant case where the amount was a composite one calling for an enquiry as regards its break up with reference to the different Clauses of section 43B. Further, in that case the first proviso was not cited before nor considered by the Court. As such, it was held by the Court that mere statement in the Tax Audit Report that the amount was not paid during the previous year, was sufficient to make the disallowance. The decision in Jagatdal Jute''s case (supra) was rendered after taking into consideration the effect of the provisos and it was held that no disallowance could be made u/s 43B merely on the basis of statement as regards non-payment made in the Tax Audit Report without making further enquiry. It was submitted that this Court should be pleased to follow the view already taken in Jagatdal Jute''s case (supra).
He also relied on the decision in the case of Gopi Krishna Granites India Ltd. Vs. Deputy Commissioner of Income Tax, . The said case was also distinguishable on facts. In that case also, the amount specified in the Tax Audit Report only represented interest falling within Clause (d) of section 43B and no enquiry as regards its break up with reference to the different Clauses of section 43B was necessary. Further, in that case it was held that it was the admitted position that the liability for the interest amount was not incurred and had not accrued during the relevant previous year and that such interest was payable in the next year. As such, the Court held that the disallowance could be made. There are no such admitted facts in the instant case. The said decision was rendered on its own facts and does not provide any assistance in deciding the question arising before this Court.
He further drew our attention in the case of Shree Digvijay Cement Co. Ltd. Vs. Commissioner of Income Tax, . In that case, the Supreme Court relying on the decision in the case of Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, held that interest on the outstanding sales tax formed part of the sales tax and could be made subject matter of prima facie adjustment u/s 143(1)(a). It was submitted that the view of this Court on the issue is different from that of the Gujarat High Court.
After considering the facts and circumstances of this case and the decisions cited at the Bar, it appears to us that the Tribunal upheld the adjustment made u/s 43B on the ground that it was based on the observation made by the Tax Auditor in the Tax Audit Report. It further appears from the fact that the assessee filed its returns for the assessment year 1989-90 along with the, Tax Audit Report u/s 44AB of the Act. In respect of the said return, an intimation u/s 143(1)(a) of the Act was issued by the Assessing Officer and the Assessing Officer made the following adjustments:
(a) Disallowance u/s 43B as per Tax Audit Report Rs.1,66,20,887/-.
(b) Donation debited to profit and loss account disallowed for want of any receipt and also for want of any valid certificate for tax exemption certificate filed Rs.42,25,532/-.
As a result of the aforesaid adjustments, the assessee was made liable for payment of additional tax over and above the normal tax. The assessee filed an application u/s 154 of the Act objecting to the said adjustments. The assessee also furnished break up of the sum i.e., Rs.1,26,7731- for commission to the Directors and Bonus Rs.1,50,00,000/-, both fall under Clause (c) of section 43B and Provident Fund contribution (Rs.14,94,084/-) falling under Clause (b) of section 43B and our attention was also drawn to the evidence in support of such claims which is annexed to the paper book. It further appears that the Assessing Officer by an order dated 28th February, 1992 u/s 143(1)(a)/154, out of the said sum of Rs.1,66,20,857/- allowed a sum of Rs.1,51,47,884/- and the Provident Fund contributions (i.e. Rs.14,72,142/-). The disallowance u/s 43B was retained to the extent of Rs.14,72,973/- (i.e. Bonus Rs.14,51,03/- and Provident Fund contribution Rs.21,942/-). It further appears that a portion of the assessee''s claim for deduction u/s 80G was also allowed. It was also appears to us that three appeals were preferred by the appellant/assessee which were decided by the Commissioner of Income Tax (Appeals) dated 28th December, 1994. The Commissioner allowed the assessee''s appeals and the revenue preferred an appeal before the Tribunal objecting to the deletion of adjustment of Rs.14,72,973 u/s 43B. The Tribunal held in favour of the assessee that no prima facie adjustment could be made u/s 143(1)(a) on the ground that proof in support of a claim was not submitted with the return. Thus, the Tribunal upheld the adjustment made u/s 43B on the ground that it was based on the observation made by the Tax Auditor in the Tax Audit Report.
After considering the decisions cited at the Bar, we agree with the view taken by the Bombay and Delhi High Court as well as by our High Court and we also hold that the exercise of power u/s 143(1)(a) is required to be scrutinized carefully and should be kept strictly within the four corners of the statute, any dispute being resolved in favour of the assessee. [See Khatau Junkar Ltd. and another Vs. K.S. Pathania and another, (1992) 193 ITR 95 (Delhi) (supra) and (1995) Modern Fibotex India Ltd. and Another Vs. Deputy Commissioner of Income Tax and Others, ].
We have also considered section 43B and we accept the contention of Mr. Khaitan appearing for the Assessee and hold that section 43B provides for deduction of any Provident Fund contribution falling under Clause (b) and Bonus falling under Clause (c) only in the year of actual payment. However, by reasons of the first proviso, deduction is also allowed in respect of Bonus falling under Clause (c) paid after the close of the previous years, that is, in the next accounting year but on or before the due date for filing the Income Tax return in respect of the previous year. In the instant case, evidence of such payment has been furnished along with the Income Tax return. The second proviso applicable in respect of Provident Fund contribution falling under Clause (b) provides for deduction only if payment has actually been made as per the Provident Fund law. [See Allied Motors (P.) Ltd. Vs. Commissioner of Income Tax, Delhi,
It is also necessary for the Assessing Officer to examine second proviso before making any disallowance. A disallowance cannot be made u/s 43B simply because payment was not made within the previous year. From the facts it appears that the information contained in the Tax Audit report did not enable the Assessing Officer to make any prima facie adjustments u/s 143(1)(a) with reference to the provisions of section 43B. It further appears that the Tax Audit report did not contain any break-up of the amount or the further information required in the light of the two provisos to section 43B. The Tax Auditor did not specify in the Tax Audit report the amount inadmissible u/s 43B. Therefore, it appears to us that it was necessary for the Assessing Officer to issue a notice u/s 143(2) for the purpose of making an proper assessment u/s 143(3).
In the case of Jagatdal Jute & Industries Ltd. (supra), it has already been decided that for making a disallowance u/s 43B, further enquiry was necessary and the power u/s 154 could not be exercised merely on the basis of the information contained in the Tax Audit report without holding such enquiry. It was also necessary for the Assessing Officer to give an opportunity of hearing to the assessee by service of notice u/s 143(2) and the matter could be gone into u/s 143(3) and not by way of prima facie adjustment u/s 143(1)(a). [See G.K.W. Ltd. v. C.I.T. (supra)].
It further appears to us that the decision of the Kerala High Court C.I.T. v. Sitaram Textiles Ltd. (supra) is distinguishable in the facts and circumstances of this case. After considering the effect of the provisos held u/s 43B merely on the basis of statement as regards non-payment made in the Tax Audit report ought not to have been done without making further enquiry.
We have considered the decisions of this High Court in the cases of (1) Hindustan Motors Limited Vs. Commissioner of Income Tax, (2) Commissioner of Income Tax Vs. Padmavati Raje Cotton Mills Ltd., and (3) Commissioner of Income Tax Vs. Orient Beverages Ltd., ; and, in our opinion, the decisions cited on behalf of the Revenue, cannot be a help to them in the facts and circumstances of this case.
In the case of Allied Motors (P) Ltd. (supra), the Supreme Court held that:
"While interpreting section 438 without the first proviso, some of the High Courts, in order to prevent undue hardship to the assessee, had taken the view that section 43B would not be attracted unless the sum payable by the assessee by way of tax, duty, cess or fee was payable in the same accounting year. If the tax was payable in the next accounting year, section 43B would not be attracted. This was done in order to prevent any undue hardship to assesses such as the ones before us. The memorandum of reasons takes note of the combined effect of section 43B and the first proviso inserted by the Finance Act, 1987. After referring to the fact that the first proviso now removes the hardship caused to such taxpayers, it explains the insertion of Explanation 2 as being for the purpose of removing any ambiguity about the term "any sum payable" under clause (a) of section 438. This Explanation is made retrospective. The Memorandum seems to proceed on the basis that section 43B read with the proviso takes care of the hardship situation and hence Explanation 2 can be inserted with retrospective effect to make clear the ambit of section 43B(a). Therefore, section 43(a), the first proviso to section 43B and Explanation 2 have to be read together as giving effect to the true intention of section 43B. if Explanation 2 is retrospective, the first proviso will have to be so construed. Read in this light also, the proviso has to be read into section 43B from its inception along with Explanation 2."
The Court further held that:
The departmental understanding also appears to be that section 43B, the proviso and Explanation 2 have to be read together as expressing the true intention of section 43B. Explanation 2 has been expressly made retrospective. The first proviso, however, cannot be isolated from Explanation 2 and the main body of section 43B. Without the first proviso, Explanation 2 would not obviate the hardship or the unintended consequences of section 43B. The proviso supplies an obvious omission. But for this proviso the ambit of section 43B becomes unduly wide bringing within its scope those payments, which were not intended to be prohibited from the category of permissible deductions.
Accordingly, following the decisions of our High Court and the Supreme Court, we hold in favour of the assessee and answer both the questions in the negative.
For the reasons stated hereinabove the appeal is allowed.
Urgent Xerox certified copy of this order, if applied for, be supplied to the parties subject to compliance with all requisite formalities.
Sankar Prasad Mitra, J.
I agree.