1. This appeal is directed against the order dt. 26th February, 1999 passed by Shri A. K. Jha, CIT(A)-XI, Calcutta and the grounds raised are as follows : (1) "That on the facts and in the circumstances of the case, the learned CIT(A) was not justified in confirming that the profit on sale of assets amounting to Rs. 6,02,35,000 is not an item for being set off from the computation of book profit as per provision of s.
115JA." (2) "That on the facts and in the circumstances of the case, the learned CIT(A) was not justified in not considering the ground of exclusion on account of benefit available to the appellant in respect of customs duty on future import which is purely of notional in nature." 1.1. Ground is also raised against the legality of the adjustment under s. 143(1)(a) of the Act.
The assessee is a public limited company engaged, inter alia, in the business of manufacture and sale of alloy, special sheets and other allied items. For the previous year ended on 31st March, 1997, the return filed by the assessee was processed under s. 143(1)(a) of the Act. In the return filed, the assessee had disclosed negative income of Rs. 7 crores plus. In the computation sheet attached to the return of income, the assessee had made certain adjustments to arrive at the loss computed and had also made calculation of MAT under s. 115JA. The relevant extract of the computation sheet reads as under : A. "Total loss computed under provisions of IT Act, 1961 for asst. yr. 1997-98 74,356,618 Computation of MAT under s. 115JA Profit before tax as per the P&L a/c for the financial year ended 31st March, 1997 50,658,000 Less : Book profit on sale of assets 60,235.000Revised loss as per P&L a/c drawn up in accordance with Parts II and III of Sch. VI to Companies Act, 1956 9,577.000" B. "Adjusted in view of decisions of Calcutta and Delhi Tribunals, the reason being that profit as per P&L a/c prepared in accordance with provisions of Parts II & III of Sch. VI of Companies Act, 1956 should not include profits inter alia earned on sale of "capital assets" within the meaning of s. 2(14) of the IT Act, 1961.
The AO made certain adjustments and issued intimation under s.
143(1)(a) on 4th August, 1998. He computed the income as under : Rs. Add : Benefit of duty-free import entitlement on accrual basis vide Note-19 of printed account. Assessee, in the computation of income, described the same as notional income on probable future sale of import entitlement licence. Since Note-19 of printed accounts categorically mention the same as accrual of income, the same is disallowed. Book profit as per P&L a/c 5,06,58,000Assessee claimed deduction of book profit on sale of asset of Rs. 6,02,35,000 on the basis of decision of Calcutta and Delhi Tribunal. But since such adjustment is not permissible under s. 115JA(2) of the IT Act assessee's claim in this regard is not accepted Nil Add : (i) Provision for leave encashment 51,47,000 (ii) Provision for doubtful debt 4,54,000 56,01,000 ------------- Taxable income being 30 per cent of Rs. 5,62,59,000 i.e., Rs. 1,68,77,700 since total income under s. 115JA is higher than processing income under s. 143(1)(a), the same, i.e., Rs. 1,68,77,700 is taken as total income." 2. The assessee appealed before the CIT(A). With regard to the adjustments in respect of the profits on sale of fixed assets, it was submitted that the profits were capital receipts and such profits could not be in accordance with the provisions of Parts II & III of Sch. VI to the Companies Act, Placing reliance on the case of Sutlej Cotton Mills Ltd. vs. Asstt. CIT (1993) 46 TTJ (Cal) 310 (SB) : (1993) 45 ITD 22 (Cal)(SB) as also on in the case of Oswal Agro Mills Ltd. vs. Dy.
CIT (1994) 51 ITD 447 (Del), it was claimed that they were required to be excluded from the book profits.
3. With regard to the duty-free import entitlement, it was submitted that the assessee had passed book entries debiting export benefit receivable account and crediting miscellaneous income account and these credit and debit entries were merely book entries and did not give rise to any income and hence the same was excluded from taxable income.
4. The CIT(A), however, did not agree with the assessee's representations. He distinguished the Tribunal's decisions, by stating that in both the cases the Tribunal was concerned with the income chargeable under the head 'capital gains' and further in both the cases the assets transferred were not business assets but were held on account of investment whereas in the case of the assessee, the facts were otherwise in the sense that the assets were business assets on which depreciation allowance was allowed in past and further in computing the profits and gains of business, the depreciation allowance was claimed by the assessee for the previous year and in determining the written down value of the block of assets, the appropriate adjustment for sale of such fixed assets was also considered and further no income under the head 'capital gains' was chargeable in assessee's case for this year. Moreover, the assessee prepared the P&L a/c as per the provisions of Sch. VI to the Companies Act and in such account, profit on sale of assets was duly credited and, therefore, such P&L a/c was binding on the Department as well as on the assessee and only adjustments permitted under Expln. to s. 115JA(2) could be carried out by the assessee as well as by the Department. According to the Explanation, no such adjustment in the profit was permissible.
5. The assessee had further argued that on any issue where more than two views were possible or on an issue which was debatable in nature, prima facie adjustment under s. 143(1)(a) could not be carried out. The CIT(A), however, held that reliance on the Tribunal's decisions was found to be misplaced and claim made by the assessee was not permitted by the express language of the Act and, therefore, such issue could not be made debatable merely because such claim is couched in a legal language.
6. Aggrieved, the assessee preferred an appeal before the Tribunal. The learned counsel for the assessee submitted as follows : 7. With regard to profit on sale of fixed assets, it was claimed that identical controversy was decided in favour of the assessee by the Tribunal in the Third Member case in the case of Asstt. CIT vs.
Northern India Theatres (P) Ltd. He placed reliance on (1990) 182 ITR (St) 1 and the Circular issued by the CBDT on the aspect of prima facie adjustment and the additional tax levied upon the assessee. It was clarified that the additional tax was similar to negligence tax so as to discipline the assessees and restrain them from making frivolous claims to avoid tax. Further, reliance was also placed on in the case of CIT vs. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC) and in the case of CIT vs. Moon Mills Ltd. (1966) 59 ITR 574 (SC).
8. Highlighting the grounds on which the CIT(A) rejected the assessee's claim, it was submitted that the assessee would be chargeable to capital gains in appropriate circumstances. The profits realized were required to be credited to block of assets and the same was done so as to reduce the written down value of the block of assets. Consequently, the assessee was not entitled to higher depreciation allowance and accordingly higher tax would be paid by the assessee.
9. With regard to the import entitlement, placing reliance in the case of Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 746 (SC) it was submitted that notional income can never be brought to tax. The entries were passed in the books only to improve the financial picture of the assessee-company.
10. The learned senior Departmental Representative while placing strong reliance on the order passed by the CIT(A), submitted that entries in the accounts are not conclusive, placing reliance on in the case of Workmen of Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd. (1986) 157 ITR 77 (SC). Pressing into service the decision in the case of McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC), it was submitted that the proper way is to construe a statutory provision is the purpose of the statute has to be kept in mind and if it is found that the assessee has adopted a device to avoid tax, the same could not be encouraged. Further in this case, attempt was made by the assessee by passing entries to take out something which was taxable. Sale of assets is taxable income. Besides, with regard to import entitlement, cl. (iiib) of s. 28 was applicable and not cl.
(iiia) of s. 28. He further emphasized that once income had accrued, as in this case, there was no question of not bringing the same to tax. He further submitted that there were several grounds in the memo of appeal but the assessee did not argue the case and, therefore, he refrained from making submission.
11. In reply, the learned counsel for the assessee was fair enough to submit that other grounds be treated as not pressed. He further submitted that the attitude of the AO was to tax something and, therefore, the adjustments were made in the intimation issued. If the attitude of the AO was to find out only the items which are apparently taxable or disallowable, then he would refrain himself from making adjustments as were made.
12. We have considered the material to which our attention was drawn.
We have to consider the controversy in the light of the provisions contained in s. 143(1)(a) of the Act. The scheme of summary assessment was encouraged with a view to enabling the administration to speed up the work of assessment in the bulk of cases which did not involve any substantial points of disputes, while, at the same time, guarding against the leakage of the revenue in cases where the income declared happened to be grossly understated. Though the scheme underwent various changes at various stages, the purpose remained the same. The AO was empowered to make only prima facie adjustments as specified in the statute and as per the guidelines issued by the CBDT from time to time.
Such adjustments are likened with apparent mistake as envisaged under s. 154 of the Act because variation in the income or loss as declared in the return would attract additional tax. The Board in its circular has stated it as 'negligence tax' to be levied on the assessees for not filing the returns in accordance with law. This presupposes that the assessee is required to file the return in accordance with law, that is to say, in accordance with legal position prevailing at the time when the return of income or loss is filed. This again presupposes that not only the assessee but also the AO are supposed to be up-to-date as far as legal position is concerned with regard to various provisions of the Act. In the light of this, let us take up the first issue with regard to the capital profits, vis-a-vis, provisions of s. 115JA concerning deemed income relating to certain companies. This section was brought into the statute book vide Finance (No. 2) Act of 1996 w.e.f. 1st April, 1997, and is said to be in pari materia with earlier s. 115J which has been rendered inoperative with effect from the asst. yr.
1991-92 by an amendment made to sub-s. (1) by the Finance Act, 1990 w.e.f. 1st April, 1990. The rationale offered by the Government for the introduction of s. 115JA remains the same as was given when somewhat similar provisions were introduced for the first time by the Finance Act, 1983 w.e.f. 1st April, 1984. These provisions were contained in s.
80VVA and remained on the statute book from asst. yr. 1984-85 to asst.
yr. 1987-88 i.e., for a period of 4 years. The provisions were again reintroduced by the Finance Act, 1987 by introduction of a new s. 115J and these provisions remained in force from asst. yrs. 1988-89 to 1990-91 i.e., for a period of three assessment years. The successive Finance Ministers at various stages stated that it seemed reasonable that profitable and prosperous companies should contribute at least a small proportion of their profits to the national exchequer at a time when other and less better off sections of the society were bearing a burden. Because of the various hardships, complications, litigations, etc., provisions of s. 80VVA and s. 115J were given go-by but again the need was felt and the present s. 115JA was introduced with the same rationale. The present scheme is more or less a replica of the provisions of s. 115J with certain important changes such as losses shall not include depreciation and book profit shall mean the net profit after allowing for depreciation for the relevant previous year as debited in the P&L a/c laid before the company at its annual general meeting. Thus, the assessees are expected to file their returns of income keeping in mind the judicial pronouncements in connection with the various provisions of s. 115J which are similar to those found in the present s. 115JA. When the return of loss was filed by the assessee, the legal position with regard to the capital profits on the sale of either investment or other assets was cleared by the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd. (supra) where the order was passed in October, 1992, where, among other things, it was decided that the profit realized by the sale of the shares could not form part of the book profit as required to be shown in the P&L a/c under the provisions of the Companies Act. Moreover, it is further held, when s. 115J was brought in, the object was to introduce the provision whereby every company will have to pay minimum tax on the profits declared by it in its own accounts and these profits could only be those which are assessable as income under the Act and not the profit on realization of capital asset. Subsequently, in December, 1995 because of the differences between the two Members of the Tribunal of the Delhi Bench, the matter was referred to the Third Member in the case of Northern India Theatres (P) Ltd. (supra) where by majority it was held that if items of credit which do not relate to the business carried on by the company are found included in the P&L a/c, such profit and loss account cannot be called as P&L a/c prepared in accordance with the requirements of Parts II and III of VIth Schedule of the Companies Act, 1956. In that case before the Third Member, the controversy was with regard to the profit on the sale of electrical transformer and the immovable property and it was further held that such capital profits yield only capital gains and they do not partake the character of business profits and in this case the two decisions of the jurisdictional High Court, namely, Pt. Deo Sharma vs. CIT (1953) 23 ITR 226 (All) and CIT vs. Sugauli Sugar Works (P) Ltd. (1983) 140 ITR 286 (Cal) were also applied.
13. Such being the position with regard to the profit on the sale of assets, the assessee rightly made adjustments while filing the return of loss and the AO had no power to ignore this adjustment made by the assessee in the return of income. In the summary assessment, the AO has powers to make adjustments firstly of arithmetical errors in the return, accounts and documents and secondly of carried forward loss etc. which on the basis of information available in the returns, accounts or documents, is prima facie admissible but not claimed or is prima facie inadmissible but is claimed. In the case under consideration the AO has not kept in mind the legal position narrated above and failed the ascertain whether the assessee was correct in making adjustment as per the legal position obtaining at the time of filing of the return. The AO's powers in this regard, are strictly controlled by the words "which on the basis of information available in returns, accounts or documents". The AO, therefore, cannot travel beyond this information while making adjustments, even if he holds the view that the deduction allowance or relief is wrongly claimed. The fetter on the powers of the AO to make adjustments was aptly enunciated in the judgments of the two High Courts in the case of Khatau Junkar Ltd. vs. K. S. Pathania (1992) 196 ITR 55 (Bom) and in the case of S.R.F. Charitable Trust vs. Union of India (1992) 193 ITR 95 (Del). In a literal sense, prima facie means on the face of it and hence on the face of the return and documents and accounts accompanying it, the deduction claimed must be inadmissible. If further enquiries are necessary or proof is required in connection with the claim, notice under s. 143(2) has to be issued. The AO cannot disallow a claim because in his view adequate evidence is not before him. He can disallow a claim for deduction only if he is satisfied on the basis of material that the assessee is not entitled to such deduction.
14. It may be kept in mind that no notice is required to be given for making adjustment under s. 143(1)(a) and, therefore, unless the provisions are strictly followed and only apparent adjustments are made, gross injustice would be caused to the taxpayers. In the facts before us, if the assessee would not make such claim in the return of income, he would be a loser for ever. His liability to tax could not be made dependent on some fortuitous circumstances. See in the case of Modern Fibotex India Ltd. vs. Dy. CIT (1995) 212 ITR 496 (Cal). In that case the assessee claimed in the return that the cash compensatory support was not taxable (this was made taxable by subsequent amendment to s. 28) and it was held by the High Court that the assessee was fully justified in making the claim when the return was filed and no adjustment on account of cash compensatory support could be made under s. 143(1)(a), so as to attract additional tax.
15. The CIT(A) has also fallen into the error in not keeping in mind the fact that the assessee was required to file return of loss on the basis of legal position as prevailed at the time of filing of the return. He has also failed to take note of the fact that the provisions of s. 115JA were pari materia with s. 115J and the judicial pronouncements were available in regard to the meaning of book profit as understood qua similar provision and whether the profit on sale of assets giving rise to the capital gain could be taken out of the book profits or not. He has also stated that no adjustment could be made in the P&L a/c prepared by the company and it was binding on the assessee as also on the Department. But this finding is totally contrary to the decision of the Special Bench in the case of Sutlej Cotton Mills Ltd. (supra) where power of the AO to make the adjustment to the profit shown as per the P&L a/c has been recognized by stating "the power to adjust the book profit will have to be conceded to the AO". The CIT(A) in the light of above discussion, should have favourably considered the contention of the assessee that when two views were possible, the view favourable to the assessee should be taken, especially when no adjustment could be made under s. 143(1)(a) in respect of debatable issues. Therefore, the order passed by the CIT(A) on this issue is set aside and the assessee's claim is accepted.
16. With regard to the second issue in respect of notional income as claimed by the assessee in connection with the import entitlement licence, we are not convinced by the case of the assessee. It is an admitted position that the income has accrued and that is why credit for the same has been taken to the P&L a/c. Note 19 in the accounts reads as under : "Export Benefit Receivable. Benefit arising on duty-free import entitlement against exports made by the company hitherto accounted for on receipt basis has with effect from the current financial year, been accounted for on accrual basis. As a result, profits for the year are higher by Rs. 228.34 lakhs which is included under miscellaneous income in Sch. 15." 17. The AO does not have any material on record to come to the conclusion how the income cannot be considered as accrued. His knowledge with regard to the rules and regulations of the import and export policy etc. may be limited because he is not expected to deal with those provisions. The statutory auditors have certified that the profit shown as per the P&L a/c is true and fair and the same is also admitted by the board of directors as also tax auditor. Details with regard to the scheme were not furnished with the return of income.
Therefore, the AO could not ascertain as to how on the basis of scheme, rules, etc., the profit could not be stated to have accrued. The only evidence before the AO was the return of income and audited financial statements. He even did not have details of the entries made because of the groupings made in the financial statement. As stated earlier, the jurisdiction of the AO under s. 143(1)(a) to make adjustment and to issue an intimation is limited to the obvious points. This is clear from the language of section and is supported by the authority as well as by the circular issued by the CBDT in this connection. The nature of the power is limited to those adjustments in respect of which s. 154 would provide an adequate remedy. However, similarity between the power under s. 143(1)(a) and s. 154 is limited only to this extent viz. the determination of the liability as ascertained from the return as filed and the likeness ends there. The differences are many. Firstly, the power under s. 143(1) may be exercised only in the circumstances mentioned in s. 143(1) and s. 154 is not so limited. Secondly, s. 154 requires an opportunity to be given to the assessee whereas there is no such opportunity under s. 143(1) and thirdly, the consequences of a rectification do not result in the payment of additional tax, whereas an adjustment under s. 143(1) does. The intimation, as far as the AO is concerned, is final, except these few differences, the effect of adjustment in both the sections would be same, that is to say, apparent adjustment. The adjustments sought to be made by the assessee should be so apparent from the evidence placed before the AO under s. 143(1) that he would immediately agree to the stand taken by the assessee, but no such evidence was ever placed before the AO and, therefore, we cannot find fault with the AO whose order is confirmed by the CIT(A). We uphold the same. Therefore, on this point the assessee's ground is rejected.
18. The learned senior Departmental Representative relying upon the two judgments of the apex Court, submitted that the device adopted by the assessee should be discouraged and provision of statute should be so construed as to advance the statutory intention. Nobody can have doubt with this proposition. But one has to find out and understand in the complex facts and in the world of complex law, it includes statute plus judicial pronouncements, whether the assessee has really adopted any device to avoid tax. On the contrary, the sections which impose the charge or levy, should be strictly construed and this position though made clear in CIT vs. Mahaliram Ramjidas (1940) 8 ITR 442 (SC) and subsequently by the Supreme Court in India United Mills Ltd. vs. CEPT (1955) 27 ITR 20 (SC) and thereafter in various other judgments, still prevails as the correct law. Therefore, the assessee cannot be taxed unless there is clear provision of the law to tax him and in the facts before us, there is no question of any device but it is a question of interpretation of a statutory provision in the context of interpretation given by various judicial pronouncements. Therefore, the ratios laid down by the cases relied upon by the learned senior Departmental Representative are not applicable to the facts of the case. This is with regard to the adjustment in respect of capital profits. With regard to the second point in respect of import entitlement, we have already decided the point against the assessee, though to some extent for a different reasons.
19. To the extent as above, the appellant order is modified and the AO is directed to revise the assessment.
20. In the result for the purpose of statistics only, the appeal is allowed in part.