2. The original assessment in this case, was completed under section 143(3) on 10-8-1989 on a total income of Rs. 58,32,820. It was modified by an order under section 251 of the IT Act determining total income at Rs. 57,79,580. In the original assessment a deduction of Rs. 18,54,101 had been allowed under section 32AB of the IT Act. Later on it appeared from the record that the deduction had been wrongly allowed. A notice under section 154 was issued on 23/24-1-1991 for rectification. It was pointed out to the assessee that as per the provisions of section 32AB(3)(a) the amounts of Rs. 95.25 lakhs (write back of liability), Rs. 10.75 lakhs (capital gains) and Rs. 5.05 lakhs (income from other sources) had been wrongly taken in the computation under section 32AB.3. The assessee furnished reply to the Assessing Officer which is reproduced as under : "4. It will be clear from the provisions of sections 32AB(3) that the computation of profits of eligible business or profession will have to be made by taking into consideration the profits as per the requirements of Schedule VI of the Companies Act (Parts II & III) and then making adjustments for the items mentioned in sub-section (3)(a). It is on this profit so arrived at one has to apply 20% to arrive at the maximum deduction eligible under section 32AB. 5. In the light of the above, the points raised by the audit are dealt with below :- Net profits of the Company as per the requirement of Schedule VI of the Companies Act should include income from dividend. Sub-section 3(a) of section 32AB does not specify that the dividend income should be excluded while computing the income from the profits of eligible business or profession. Thus, there is no need to delete the amount of dividend credited to the P&L A/c. It is irrelevant for this purpose in what manner, the business income is computed under Chapter IV of the Income-tax Act.
This income has been credited to the P&L A/c as per the requirement of provisions of Schedule VI of the Companies Act. Sub-section 3(a) of section 32AB does not require this item to be deleted while arriving at the profits of eligible business or profession.
Accordingly there is no need to delete this amount. It is irrelevant for this purpose in what manner, the business income is computed under Chapter IV of the Income-tax Act.
(c) Inclusion of Rs. 95,25,670 credited by way of write back of liability : Sub-section 3(a) of section 32AB requires that the net profit as per the account should be reduced by the amount or amounts withdrawn from reserves or provisions if such amounts are credited to the P&L A/c. In this connection, it would be relevant to reproduce the definition of the terms 'Provisions' and 'reserves' under the Companies Act as stated in Circular No. 461 dated 9-7-1986 of CBDT : 1. The term provision means any amount written of or retained by way of providing for depreciation, renewals or diminution in value of asset or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.
2. The expression 'reserve' shall not include any amount written off or retained by way of providing for depreciation, renewal or diminution in value of the assets or retained by way of providing for any known liability. - Unquote It will be seen that the definition of 'Provision' and 'Reserves' exclude from its purview a liability which is duly determined and debited in the accounts of an assessee. An amount retained by way of providing for a liability which cannot be determined is termed as a provision.
In the accounts for the year 1987-88, an amount of Rs. 95,25,670 has been shown as write back of liability of Excise Duty provided in earlier years. This liability was debited in the accounts in the earlier years based on the order of the Asstt. Collector of Central Excise demanding payment of excise duty on ingots manufactured by the Company. Clearly, therefore, this is not a provision for unascertained liability. Also, this amount was allowed as a deduction in computing the income from business of the years in which the provision were made by way of a properly determined liability. Therefore, withdrawal of the liability provided in the earlier years on account of a favourable order of the Patna High Court does not amount to withdrawal of provision in the sense contemplated in sub-section 3(a) of section 32AB. Therefore, there is no need to deduct this amount of Rs. 95,25,670 from the net profit to arrive at the profits of eligible business or profession.
It will be relevant to state that the withdrawal of reserves or provisions contemplated in sub-section 3(a) is complementary to the add back of amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities as stated in sub-clause (v) of sub-section 3(a).
6. It will, therefore, be seen that the profits of eligible business or profession for the purposes of ascertaining the amount of deduction is not the same as the 'Income from business'. Such profits for the purpose of investment deposit will have to be specifically calculated in the manner provided. Accordingly, the audit comment is not correct in stating that the amount of Rs. 18,54,101 calculated and allowed in assessment under section 32AB of the Act is not correct." 4. The Assessing Officer considered the aforesaid reply of the assessee and rejected the same after making the following observations : As per the provisions of clause 3(a) to section 32AB, profits from eligible business as computed as per VIth Schedule of Company Act, 1956 should be reduced by the amount withdrawn from reserves and provisions, if such amounts are credited to the profit and loss account.
In this case a sum of Rs. 95.25 lacs representing write back of provision for liability made in the accounts up to the assessment year 1984-85 for excise duty on ingots was credited to the profit and loss account for the assessment year 1988-89 consequent upon the decision of Patna High Court in the favour of Company.
As per Part III of Schedule VI of Company Act, 1956, where any amount returned by way of providing for any known liability is in excess of the amount which is in the opinion of the directors is reasonably necessary for this purpose, the excess shall be treated for the purpose of Schedule VI of Company Act 1956 as 'reserve" and not provision. As such, after the High Court decision, the provision made in the accounts up to assessment year 1984-85 was to be considered as "reserve" and the amount withdrawn from this reserve should have been deducted from profit as per provisions of section 32AB(3)(a) of IT Act, 1961.
The assessee has quoted Circular No. 461, dated 9-7-1986. As has been quoted from the Schedule VI, Part-III, it is seen clearly that in section 7(1) & (2)(ii), it has been defined that the amount of Rs. 95.25 lacs should be treated as a reserve only and not a provision. Hence, this amount is accordingly rectified.
It is seen from the case records that the profit of Rs. 10.75 lacs has been reduced from the written down value of the machinery and hence it cannot be included in the profit for the purpose of deduction under section 32AB. As this is also a mistake apparent from records, after giving full opportunity to the assessee, the same is being rectified.
(3) It is again seen from the case records that a sum of Rs. 5,04,648 has been shown in the return of income as income from other source. Hence, this is also not liable to be included for the computation of section 32AB ...." 5. After holding that the aforesaid amounts were not be taken in the computation under section 32AB he worked out the amount of deduction under section 32AB as under : "... It is apparent from the case records that no deduction under section 32AB of Rs. 18,54,101 was admissible to the assessee-company and is being rectified as below :32AB has been allowed.
92,70,507Less : The amounts which are not includable for(c) Income from other source 5,04,648 1,11,05,726 ------------ ----------- 6. Since the figure on which deduction under section 32AB was to be computed came to a negative figure of/and Rs. 18,35,218 as per the above calculation of the Assessing Officer, the deduction allowed under section 32AB of the amount of Rs. 18,54,101 was withdrawn and total income was recomputed at Rs. 76,33,680 after adding back the amount of Rs. 18,54,101 to the total income of Rs. 57,79,582. This was done by the impugned order under section 154 of the IT Act.
7. The assessee-company challenged the aforesaid order of the Assessing Officer before the ld. CIT (Appeals) in the first appeal who confirmed the order of the Assessing Officer. The ld. CIT (Appeals) observed that the amounts of Rs. 10.75 lakhs and Rs. 5.05 lakhs being capital gains and dividend income were not the profits of the eligible business but other income shown in the P&L Account. He added that apart from the income from business or profession no other income could be included in the eligible business or profession. As regards the amount of Rs. 95.25 lakhs for the liability written back, the ld. CIT (Appeals) observed that there was no ascertained liability because the payment of excise duty raised by the Central Excise Authorities was in dispute and the assessee had not actually paid the amount though claimed as deduction in the IT assessment of earlier year on the basis of the demand. The subsequent write back of the liability during the period relevant to the assessment year in question on the basis of the favourable, judgment of the Patna High Court would not make it as write back of the liabilities. The ld. CIT (Appeals) was of the view that the amount was a provision when it was claimed as a liability in the IT assessment and the provision was taken to the P&L Account in the assessment year under consideration when the Patna High Court gave favourable judgment. He added that the transfer of the provision to the P&L Account did not amount to profit for the year under consideration as per Parts II & III of the VIth Schedule of the Companies Act read with section 32AB(2)(i) and section 32AB(3)(vii) of the IT Act. With these observations he confirmed the Assessing Officer's order.
8. The ld. CIT (Appeals) further held that the mistake was apparent from record and the issue was not at all debatable and, as such, the order passed under section 154 was valid. He was of the view that the Supreme Court's judgment in the case of T. S. Balaram, ITO v. Volkart Bros. [1971] 82 ITR 50 was not applicable to the present case.
9. Aggrieved further, the assessee has come up in second appeal before this Bench.
10. The ld. counsel at the outset submitted that it was not a case covered undersection 154 of the IT Act. He added that there was no mistake apparent from record as the matters in dispute were debatable issues. He further added that the action under section 154 was initiated by the Assessing Officer on account of difference of opinion regarding admissibility of the claim under section 32AB and not on account of any mistake apparent from record. He further added that in the original assessment the claim had been allowed by the Assessing Officer after due consideration of the facts of the case and the provisions of law. He contended that there was no justification for withdrawal of the deduction allowed merely on the basis of change of opinion and views by an order under section 154 of the IT Act. He relied on the Supreme Court's judgment in the case of Volkart Bros.
(supra).
11. The ld. counsel reiterated the submissions made before the Assessing Officer and the ld. CIT (Appeals) in respect of the inclusion of each of the aforesaid 3 items in the profit of the company for computing the deduction under section 32AB of the IT Act. He submitted that there was no dispute regarding the eligible business as such. He further submitted that section 32AB(3) was very clear that the profits of business or profession of an assessee for the purpose of sub-section (1) of section 32AB shall be computed in accordance with the requirements of Parts II & III of Schedule VI to the Companies Act which will be increased and/or reduced by the items mentioned in sub-section (3) of section 32AB. He contended that the capital gains and dividends were part of the income of the business of the company, though under the IT Act they are assessed under the head separate from the head 'Profit and gains of business or profession.' He added that under the Companies Act these 2 items were part of the profit of the business of the company. He argued that since the profits of business or profession for the purpose of deduction under section 32AB had to be computed in accordance with the requirements of Parts II & III of Schedule VI to the Companies Act, the question of excluding the dividend and capital gains from the profits of business or profession of the company did not arise.
12. As regards the amount of Rs. 95.25 lakhs for liability written back, the ld. counsel submitted that the findings given by the Assessing Officer and the ld. CIT (Appeals) were based on wrong appreciation of the facts of the case and the nature of the amount in question. He added that the amounts had been claimed and allowed as deduction in the IT assessment in the earlier year on the basis of the demand of the excise duty raised by the Central Excise Authority. The assessee followed mercantile system of accounting with regard to the liability in question and, as such, the demand raised by the Central Excise Authorities had been claimed as deduction. It was clearly an ascertained liability on the basis of the demand raised and the view of the ld. CIT (Appeals) that it was a provision was totally misconceived and wrong. He further added that the question of actual payment of liability was not a factor to determine whether the liability was ascertained or not. Therefore, the ld. CIT (Appeals) was wrong in his view that because the liability had not been paid it was a provision and not an ascertained liability.
13. The ld. counsel further submitted that when the Patna High Court gave favourable order and the liability had become non-existent, the same had been added to the profit and loss account as provided under section 41 (1) of the IT Act for the assessment year in question. He contended that the amount of liability written back was clearly a profit as provided in section 41 (1) of the IT Act. He added that view of the ld. CIT (Appeals) that it was not a profit but a provision was totally misconceived, wrong and contrary to the provisions of law.
14. The ld. counsel further submitted that the assessee had filed report under section 132AB by the renowned Chartered Accountant, S. B.Bilimoria & Company, who had given detailed computation of the deduction under section 32AB. They had considered the audited accounts including the 3 items in dispute and taken the 3 items also in the computation of deduction under section 32AB. He added that their report was based on correct appreciation of the accounting methods, the provisions of the Companies Act and section 32AB of the IT Act.
15. The ld. counsel contended that the Assessing Officer was not justified in withdrawing the deduction under section 32AB by the impugned order passed under section 154.
16. The ld. D.R., on the other hand, supported the order of the ld. CIT (Appeals). She submitted that the order passed under section 154 was proper and justified because the mistake was apparent from record. She added that in the original assessment the aforesaid 3 items had wrongly been included for the purpose of computation of deduction under section 32AB of the IT Act. She contended that there was no debatable issue involved in the case because the 3 items in question were apparently not includible for the purpose of computation of deduction under section 32AB. She further submitted that the mistake of fact as well as the mistake of law both were covered under section 154 of the IT Act and, as such, the action of the Assessing Officer to rectify the assessment and withdrawing the deduction allowed under section 32AB was proper and valid. She relied on the Supreme Court's decision reported in 34 ITR 143. The ld. D.R. further submitted that the capital gains and dividend were not profit of business or profession and, as such, they could not have been included in the profit of the business for the purpose of computation of deduction under section 32AB. Again she submitted that the amount of Rs. 95.25 lakhs being liability written back, was transfer of provision to the P&L Account for the assessment year in question and, as such, the same was not includible in the profit of the year for computation of deduction under section 32AB as provided in section 32AB(3) of the IT Act. She also referred to the meaning of 'provision and reserve' given in Part III of Schedule VI to the Companies Act and contended that the amount of Rs. 95.25 lakhs fell within the definition of provision and reserve.
17. We have given careful consideration to the facts of the case, the submissions of the rival parties, the provisions of law and the decisions relied upon. We are of the view that the aforesaid 3 items were includible in the profit of the company for the purpose of computation of deduction under section 32AB of the IT Act. At the outset it must be clearly understood that the profits of business or profession of an assessee for the purpose of deduction under section 32AB have to be computed in accordance with the requirement of Parts II & III of Schedule VI to the Companies Act subject to increase or decrease or profit as provided in sub-section (3) and also in Parts II & III of Schedule VI to the Companies Act. It is, thus, clear that the computation of the profits of business or profession for the said purpose is not to be made in accordance with the provisions of the IT Act. Hence, the bifurcation of the profit of the business of the company into different heads of income like profits and gains of business or profession, income from house property, income from capital gains and income from other sources, etc., is not required as is done for the purpose of computation of income under the IT Act. Capital gains and dividend were part of the profit of the business in accordance with Parts II & III of the Schedule VI to the Companies Act.
The ld. CIT (Appeals) was not justified in holding that since the capital gains and dividend are assessed under the heads of income other than the head 'Profit and gains of business or profession' under the IT Act, they would not constitute part of the profits of business or profession for the purpose of computation of deduction under section 32AB. In holding this view the ld. CIT (Appeals) was obsessed by the provisions of the IT Act regarding computation of income under different heads and he had become oblivious of Parts II & III of Schedule VI to the Companies Act. Section 32AB(3) is very clear on the point that the profits of business or profession of an assessee for the said purpose would not be computed in accordance with the provisions of the IT Act.
18. In the above view of the matter, we hold that the capital gains and dividend were includible in the profits of the business of the company for the said purpose.
19. As regards the amount of Rs. 95.25 lakhs being liability written back we are of the view that the controversy raised by the Assessing Officer was not proper and justified. By no stretch of imagination the amount of Rs. 95.25 lakhs would be considered as transfer of provision to the P&L Account for the assessment year in question. It is an admitted fact that the assessee had claimed deduction of the said liability up to the assessment year 1984-85 on the basis of the demand of excise duty on Ingots raised by the Central Excise Authority. The liability was claimed on the basis of mercantile system of accounting followed by the assessee in this regard. Thus, as per the provisions of the IT Act the amount was allowable as expenditure. The liability was definitely ascertained because it was based on the demand raised by the Central Excise Authority. It would be wrong to say that the liability was not ascertained and it was a provision. This would be a totally misconceived and wrong view. When the Patna High Court gave favourable order the assessee-company wrote back the liability and showed the amount in the Profit & Loss Account as provided under section 41 (1).
Section 41 (1) provides that where an allowance or deduction has been made in an assessment for a year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year, - (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or (b) ** ** ** "Explanation 1. - For the purposes of this sub-section, the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first-mentioned person under clause (a) or the successor in business under clause (b) of that sub-section by way of writing off such liability in his accounts." 21. From a reading of the above it is clear that the amount of Rs. 95.25 lakhs being liability written back falls under section 41(1)(a) and the same was profit chargeable to tax.
22. In the above view of the matter the amount of Rs. 95.25 lakhs was includible in the profit of the business of the company for the assessment year in question for the purpose of computation of deduction under section 32AB. The adverse finding of the ld. CIT (Appeals), in this regard, was wrong.
23. On careful consideration of the facts and circumstances of the case and the submissions of both the parties as discussed above, we also hold that it was not a case covered under section 154 of the IT Act.
The matters of inclusion of the aforesaid 3 items in the profit of the business of the company for the purpose of computation of deduction under section 32AB, were debatable issues and they were not mistakes apparent from record which could be rectified under section 154. The claim was also allowed in the original assessment after due consideration. The subsequent action of the Assessing Officer under section 154 was a sign of change of opinion due to debatable issues in respect of the 3 items in question. There was no mistake apparent from record either on fact or in law. The facts and the law both had been considered in the original assessment. It cannot be said that the legal interpretation of the Assessing Officer as given in his order under section 154, was the only possible interpretation and that his interpretation was supported by the highest court of law. Definitely there could be another opinion different from that of the Assessing Officer with regard to the question in dispute. It is very apparent from the fact that in the original assessment these items were considered as includible in the profit of the business of the company but in the subsequent order under section 154 on change of the opinion of the Assessing Officer it was considered otherwise. There was also no apparent mistake of fact on the point in dispute. On consideration of the facts and circumstances of the case we are of the view that the Supreme Court's decision in the case of Volkart Bros. (supra) were applicable to the facts of the case. Hence, the action taken by the Assessing Officer under section 154 was not authorised by law.
Therefore, both on the merits and the includibility of the 3 above items in dispute and also regarding the validity of the action under section 154 of the IT Act, we cancel the order of the Assessing Officer and restore the deduction allowed by the Assessing Officer in the original assessment in the case.