1. This is an appeal by an assessee from the order of Commissioner of Income-tax (Appeals) Rajasthan-I, Jaipur dated 11-2-1982 confirming the order passed by the Deputy Commissioner (Asst.) under Section 154 of IT Act, 1961 (hereinafter referred to as the Act) rejecting assessee's application for modification of the adjustments made under Section 143(1) of the Act.
2. The assessee, assessed in the status of Association of Persons (AOP), returned its income from its country made liquor business and Rum Business (IMF) at Rs. 50,05, 190 for A.Y. 1990-91. Income at the above mentioned figure had been calculated in the following manner:--Total purchase price Rs. Rs.Issue price 43,63,871.12Empty Bottles &Capsuling 69,73,326.60Sales Tax 33,544.50 1,13,70,742under Section 44AC 45,48,296But profit as per bookspurposes 51,87,048(b) Rum Business (IMF)Loss as per computation 6,20,092 45,66,956(c) Profit in IMF business 4,38,236 50,05, 192 3. By his intimation dated 24-6-1991 the DC (Asst.) intimated the assessee AOP that its income had been determined at Rs. 1,55,44,250 by making an addition of Rs. 1,05,39,059 by way of adjustment under Section 143(1)(a) of the Act. Brief reasons for making adjustment were given as under:-- Rs. 1,05,39,059 on account of profit has been shown less than 40% of receipts.
Though in the body of the intimation slip it had been mentioned that an explanatory adjustment sheet was being enclosed with the intimation slip yet no such sheet was allegedly received by the assessee.
Therefore, by its letter dated 22 7-1991 the assessee objected to the adjustment made in its returned income and also requested the DC (Asst.) to supply the explanatory adjustment sheet to it. The objection and prayer were repeated by yet other letters dated 3-8-1991 and 2-9-1991. By his letter dated 4-9-1991 the DC (Asst ) explained the position to the assessee in para 2 as under:-- In the said letter you have stated that no adjustment sheet was sent to you along with the intimation sent under Section 143(1)(a).
Adjustment sheet in annexure III was sent to you which stands on page no. 2 of the intimation slip, but due to mistake it has wrongly been mentioned in the annexure III as 40% of receipts instead of 40% of purchase price. However, calculation adjustment made is as under -under Section 44AC(1)(a) - 40% of purchase Rs.price amounting to Rs. 3,93,15,268 i.e.
1,57,26,107Less: Profit shown 51,87,048 1,05,39,059Purchases 44,55,592 (includes rum)Filling expenses 69,73,327 4. The assessee AOP did not feel satisfied with the above intimation sent by the DC (Asst.) and by its application dated 18-9-1991 moved under Section 154 of the act required the DC (Asst.) to rectify the mistake made by him in increasing the returned income of the assessee by Rs. 1,05,39,059 as the adjustment made was not covered under Section 143(1)(a) of the Act for the reason that the same did not pertain to any arithmetical error or any brought forward loss, allowance, deduction, relief etc. By his order dated 7-10-1991 the DC (Asst.) rejected the said application by observing as under in paras 2 & 3 of his order:-- I have considered the arguments of the assessee's A/R and find no force therein. As per para 24.3 and 24.7 of the Circular No. 528 dated 16-12-1988 the definition of purchase price is reproduced as under:-- Purchase price for this purpose will be the cost of commodity inclusive of any excise duty, sales-tax or any other levy, whatever its nomenclature paid for by the buyer for obtaining the goods.
As per para 2 of the Circular No. 585 dated 27-10-1990 the purchase price is further clarified as under:-- Accordingly excise duty paid or payable by the buyer will also form part of the purchase price for the purpose of Section 44AC. On the same analogy, the 'Nirgam Mulya' or issue price which is paid by a buyer in the State of Uttar Pradesh will also form part of the purchase price.
3. In view of the above circulars, there is a clear concept with regards to Excise duty, Nirgam Mulya, issue price, Octroi etc. for the determination of purchase price. As such, the assessee committed an arithmetical error within the meaning of Section 143(1)(a)(i) while not taking the amount of Excise duty. Octroi for moving ou t the purchase price under Section 44AC. In view of this position, the amount of Excise and Octroi was rightly taken for the purchase and application under Section 154 does not find any merit, hence the same is hereby rejected.
5. After rejection of its application in the above manner the assessee adopted two courses. One, he challenged DC (Asst.'s) order dated 7-10-1991 in appeal to CIT (Appeals). Two, he again moved an application under Section 154 objecting to the inclusion of Nirgam Mulya, Octroi and purchase price of Rum in determining the "purchase price" for the purposes of Section 44AC of the Act.
6. By his order dated 2-1-1992 the DC (Asst.) partly accepted assessee's application under Section 154 to the extent that cost price of Rum was excluded from the "purchase price" taken by him for purposes of 44AC of the Act.
But in appeal against DC (Asst.)'s order the CIT (Appeals) made no interference. Hence this appeal by the assessee AOP against CIT (Appeals)'s order upholding DC (Asst.)'s order order dated 7-10-1991.
7. The learned counsel for the assessee vehemently urged that since the DC (Asst.) had no authority to make a huge addition of Rs. 1,05,39,059 to the returned income in the garb and guise of making adjustments under Section 143(1)(a) while sending intimation under Section 143(1), the intimation sent by him suffered from mistake apparent from record and hence was rectifiable under Section 154 of the Act. In this behalf reference was made to para nos. 5.3, 5.4 & 5.5 of explanatory notes to Section 143(1)(a), 182 ITR (St.)20, CBDTD.O. No. 133 dated 30-11-1988 to Excise Commissioner, Uttar Pradesh, circular No. 585 dated 27-11-1990 and No. 56 F.No. 156(27)/7O-TPL dated 19-3-1971. In reply the learned Senior Departmental Representative supported the order under appeal and further submitted that since the matter was being examined on merits by ITO as per the amended provisions of Section 143 of the Act the issue was of academic interest only.
8. On careful consideration of the submissions made before us and material brought on our record, we are of the opinion that the assessee should succeed in its appeal.
9. It needs no stress that prior to the amendment of Section 143 a regular assessment could be made on the basis of the return without hearing the assessee or examining his books of account and other evidence if the Income-tax Officer felt satisfied that the return filed by the assessee was correct and complete. But where the ITO did not feel so satisfied he was required to allow an opportunity to the assessee to attend before him or to produce his account books and other evidence in support of his return and an assessment could be made only after the examination of such books and evidence and after hearing the assessee.
10. With a view to enabling the administration to speed up the work of tax collection in the bulk of cases which did not involve any substantial point of dispute, and at the same time, guarding against leakage of revenue in cases where the income declared in the return happened to be grossly under-stated Section 143 was substantially amended and modified. Under the substituted provisions of Section 143(1) it is now open to the ITO to send an intimation to the assessee specifying the sum payable by him, without requiring the presence of the assessee or the declaration by him of any evidence in support of the return. In determining the tax payable in that way the Assessing Officer has the authority to make certain adjustments to the income or loss declared in the return. But these adjustments shall have necessarily to be restricted to the following fields viz.
(i) rectification of any arithmetical errors in the return and the accounts and documents accompanying it; (ii) allowance of any deduction or relief which, on the basis of information available in such return, accounts and documents is, prima facie, admissible though not claimed in the return, (iii) disallowance of any carried forward loss, deduction, allowance or relief claimed in the return but which, on the basis of information available in such return, account and document is, prima facie, inadmissible.
11. But whereas it is permissible for the Assessing Officer to allow certain deductions, allowances or reliefs like those under Section 32(2), 33(2)(ii), 33A, 35(2)(i), 35A(1) of the Act while determining the tax or interest under Section 143(1)(a)(i) on the basis of computation made in a regular assessment, if any, for an earlier assessment year or years, it is not open to him to make an addition to the profit by applying a higher rate of gross profit than shown in the books, even though in the earlier years' assessments the profit was estimated in that manner and such profit was also confirmed in appeal.
Similarly it would not be open to him to disallow any claim in respect of interest on loan even though the amounts on which interest is claimed to have been paid were added to assessee's income in a past assessment as unexplained cash credit.
12. The amended provisions of Section 143(1) are thus required to be read and understood in right perspective. It is to be kept in mind that the significant departure in the practice and procedure regulating the making of adjustments under Section 143(1) was made to serve two purposes. Firstly, as stated above, with these provisions speeding up the work of determining and collection of tax and interest in the bulk of cases which do not involve any substantial point of dispute was intended. Secondly, in cases where on the basis of documents and accounts accompanying the return it is prima facie clear that the income declared in the return is grossly understated, the leakage of revenue has to be guarded against. Decision on substantial points of dispute was not accordingly, in our opinion, intended to fall within the meaning of the expression "arithmetical error" used in the language of Clause (1) of first Proviso, nor grossly understated incomes were intended to be over-looked and ignored in the guise of allowing deductions, allowance or reliefs contemplated in Clause (ii) of the said proviso. Application of the amended provisions of Section 143(1) in accordance with its aims and objects and true spirit is neither to result in loss of any valuable right of appeal available to an assessee against enhanced assessment nor in multiplicity of proceedings. In fact in the presence of Section 143(2) there should be no scope in Section 143(1) for decision on substantial points of dispute in the name of adjustment by making rectification of arithmetical mistakes or errors or by allowing unmerited and inadmissible allowances, deductions and reliefs.
13. Now coming to the merits of assessee's case we find that the huge, difference of Rs. 1,05,39,079 between the returned and adjusted profits resulted from calculating the purchase price by the parties in the following manner viz.(1) Purchase price of country liquor Rs. 43,63,871(2) Filling expenses Rs. 69,72,326(3) Sales-tax Rs. 33,544 Rs. 1,13,70,742(1) Nirgam Mulya Rs. 2,57,46,889(2) Octroi Rs. 21,05,920(3) Purchase price of Rum Rs. 91,721 Rs. 2,79,44,525 14. The calculation made by the assessee seems to be based on the meaning and scope of Section 44AC as explained by the CBDT in their letter dated 30-11-1988 to the Excise Authorities in the State of Uttar Pradesh in para 2 whereof it was mentioned that -- 2. The issue has been examined and it has been decided that Nirgam Mulya or issue price will not form part of purchase price and consequently it will not be taken into consideration for determining the profits under Section 44AC for collection of tax at source under Section 206C of the Income-tax Act. The Excise Commissioner, Uttar Pradesh is also being informed of this decision.
15. To the same effect was Board's D.O. No. 133/501/88-TPL of the even date to Excise Commissioner, Uttar Pradesh at Allahabad: Board's letter D.O. No. 133/501/88-TPL dated 30th No v. 1988.
Clarification regarding purchase price under Section 44AC read with Section 206C. A representation was received from the Uttar Pradesh Country Liquor Traders Association for the exclusion of Nirgam Mulya from the purchase price of country liquor for the purpose of collection of tax at source under Section 206C of the Income-tax Act. In this connection you will recall my telephonic conversation with you. The matter was also discussed with Shri K.K. Bhardwaj, Deputy Commissioner Excise, Meerut Range. The entire issue has been examined in detail in the Central Board of Direct Taxes.
2. This is to inform you that the payment of Nirgam Mulya will be treated as consideration for grant of exclusive privilege and not part of the purchase price. Nirgam Mulya or issue price should, therefore, not be taken into consideration for the purposes of collection of tax at source under Section 206C of the Income-tax Act. You are requested to kindly take necessary action accordingly.
16. As against the above, the A.O. seems to have been guided by Board's Circular No. 585 dated 27-11-1990 wherein para 2 stated as under:-- 2. As a result of different systems prevailing in different States the term "Purchase Price" used in Section 44AC of the Income-tax Act was being understood in different ways. In order to clarify this point, the Finance Act, 1990 has amended the said section to provide that the purchase price would mean any amount (by whatever name called) paid or payable by the buyer to obtain the goods referred to in the Section except the bid amount in an auction. Accordingly, the excise duty paid or payable by the buyer will also form part of the purchase price for the purposes of Section 44AC. On the same analogy the Nirgam Mulya or issue price which is paid by a buyer in the State of Uttar Pradesh will also form part of the purchase price.
Thus, income-tax will have to be collected at source under the provisions of Section 206C by all persons referred to in Section 44AC of the Income-tax Act, 1961 (e.g. Central Government, State Government, local authority, corporations, etc.) at the specified rates with reference to the purchase price including the excise duty etc.
17. The above circular clearly shows that since the provisions of Section 44AC were being understood in different ways, a necessity of clarifying the position was felt. In view of this state of affairs regarding the scope and application of Section 44AC it would not be unreasonable to hold that a substantial point of dispute was there, involved in the assessment in this case, and that the nature of such dispute went beyond the scope of "adjustment" contemplated under Section 143(1) and which could have been made by "rectifying an arithmetical error" in the return. In that sense of the matter there existed mistake apparent from record in the intimation sent by the DC (Asst.) under Section 143(1) after making "adjustments". In fact, the existence of such a mistake or error apparent from record was appreciated in his second order dated 2-1-1992 by the Assessing Officer himself when he corrected or rectified the mistake regarding inclusion of cost price of Rum in the computation of "purchase price". We are thus satisfied that the order under appeal which has the effect of upholding the legality and validity of intimation sent under Section 143(1) is not correct in law and is required to be vacated. We hold accordingly and direct that the addition of Rs. 1,05,39,059 made by the DC (Asst.) by way of making "adjustments" be cancelled.
19. We, however, make it clear that nothing expressed herein shall be read as expression of the final opinion of the Tribunal on the merits of any point involved in the assessment in this case and which is, reportedly, in the process of being made consequent to action by Assessing Officer under Section 143(2) of the Act. In the regular assessment proceedings the Assessing Officer, after giving the assessee a proper opportunity of explaining its case and adducing evidence in this regard, shall be free to frame the assessment order and determine assessee's income and tax, interest etc. payable thereon according to law and the assessee shall also be at liberty to challenge that order according to law by way of appeal or revision as it may choose.