When nither proof in support of claim can be requisitioned nor expenditure can be judged it is not possible ti interfere with the finding of the CIT

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘H’ BENCH BEFORE

SHRI A.N. PAHUJA, AM AND SHRI C.M. GARG, JM

ITA no.67/Del. /2010

Assessment year: 1998-99

Assistant CIT, Central Ci rcle-

6, Room no.334, ARA Centre,

Jhandewalan Extension,

New Delhi

(Appellant)

Vs.

M/s Sahara India Financial

Corporation Ltd. , 1,

Kapoorthala Complex, Aliganj,

Lucknow (U.P.)

[PAN: 19-222-CN-1280]

 (Respondent)

Assessee by S/Shri J.J. Mehrotra &

D.R. Rajan,ARs

Revenue by Dr. B.R.R. Kumar, DR

Date of hearing 16-05-2012

Date of pronouncement 22-06-2012

O R D E R

AN Pahuja:-

This appeal filed on 06.01.2010 by the Revenue against an order dated 30.10.2009 of the ld. CIT(A)-I, New Delhi, raises the following grounds:-

“On the facts and in the circumstances of the case the ld. CIT(A) has erred in:-

1. The CIT(A) is not correct in law and facts.

2. On the facts and circumstances of the case, the learned CIT(A) has erred in law and facts in directing the Assessing Officer to rectify the order passed u/s 143(1)(a) of the Income-tax Act by deleting the adjustment of Rs.Rs.Rs.64,81,461/-.

3. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.”

2. Facts, in brief, as per relevant orders are that return declaring income of Rs.Rs.29,06,02,500/- filed on 30.11.1998 by the assessee, was processed u/s 143(1)(a) of the Income-tax Act, 1961 (hereinafter referred to as the Act), on an income of Rs.Rs.29,70,83,960/- vide order dated 16th March, 1999. Inter alia, the following prima facie adjustments were made:

[InRs. ]

a) Capital expenditure debited to P&L A/c Rs.5,090,334

b) Trade tax payable Rs.1,306,643

c) Professional Tax payable Rs. 26,590

d) Bonus Rs. 13,517

e) Employer’s contribution to PF Rs. 44,377

Total: Rs.6,481,461

2.1 Subsequently, the assessee filed an application u/s 154 of the Act, pointing out that the aforesaid adjustments were not contemplated u/s143(1)(a) of the Act. However, the Assessing Officer[AO in short] did not accept the submissions of the assessee and rejected the said application in the following manner:-

“Capital expenditure debited to P&L account: In the Tax Audit Report, the auditor has identified the amount as capital expenditure. The details of the same have been furnished in the Annexure 1 to the Audit Report. Accordingly, the same was clearly disallowable u/s 37(1) of the Income-tax Act. Since the items constituting the said amount have not been shown as bad debts, as claimed by you in the application, there was no occasion to consider the same as such within the scope of the provision of section 143(1)(a) of the Act.

Other items: These items have been shown in the Tax Audit Report as debited to the P & L account but not paid during the previous year. Thus, they were clearly hit by the mischief of section 43B. No evidence of payment of these items before the due date for filing return u/s 139(1) has been furnished with the return. There is not even a certificate from the Auditor about such payments by that date. Hence, the proviso 1 to section 43B is also applicable to this case.”

3. On appeal, the ld. CIT(A) allowed the claim of the assessee in the following manner:

 “5. I have gone through the facts and circumstances of the case, intimation under section 143(1)(a) of the Income Tax Act, petition filed by the appellant under section 154 and the order of the D.C.I.T., Central Circle-I, Lucknow passed on the petition filed by the assessee under section 154. I have also gone through the assessment order passed under section 144 of the Income Tax Act dated 21.09.2001 and the appellate order passed by the CIT(A)-III, Lucknow in appeal no. 124/CC-I/Lko/2001-02 dated 01.05.2002. I have gone through the above documents and it transpires that the facts pointed out by the Ld. Counsel of the appellant, as stated herein above, appear to be correct. It is a well settled law that what was permissible, in the first proviso to section 143(1)(a), to be adjusted as per the law effective from the assessment year 1989-90 till the amendment of section 143(1)(a) in 1999 were:-

i) only apparent arithmetical errors in the return, accounts or documents accompanying the return,

ii) loss carried forward, deduction, allowance or relief which was prima facie admissible on the basis of information available in the return but not claimed in the return, and, similarly,

iii) those claims which were on the basis of information available in the return prima facie inadmissible, were to be rectified/allowed/disallowed

This only meant that at that stage only errors apparent on the basis of records alone may be corrected that too even was permissible on the basis of information accompanying the return. The Assessing Officer was not permitted under this guise of making adjustment to adjudicate upon any debatable issue. The Hon'ble Madhya Pradesh High Court in the case of Kamal Textiles Vs. ITO 189 ITR 339 PP. 343-44 have upheld the above view. The Bombay High Court in the case of Khatau Junkar Ltd. V s. K.S. Pathania 196 ITR 55 pp. 68-69 have held that the Assessing Officer had no power to go beyond or behind the return, accounts or documents, either in allowing or in disallowing any such deduction, allowance or relief.

The Allahabad High Court in the case of Pradeep Kumar Her Saran Lal Vs. Assessing Officer 229 ITR 46 at pp. 53 have held that the Assessing Officer could not touch upon debatable and controversial Issues. The Delhi High Court in the case of S.R.F. Charitable Trust Vs. Union of India 193 ITR 95 at page 98-99 have held as follows:-

"So far as clause (iii) of the first proviso to section 143(1)(a) was concerned, it clearly provided that the Assessing Officer could make an adjustment to the income and loss declared in the return if on the basis of the information available in such return, accounts or documents, the deduction, allowance or relief claimed as prima facie in admissible. The conclusion that the claim of the assessee was in admissible must, in other words, flow from the return as filed. No power was given to the Assessing Officer to disallow a claim for the reason that there was no proof in support of the claim made by the assessee. In a way, the said clause (iii) was analogues to section 154. Where it was evident from the return as filed, along with the documents in support thereof, that a claim of the assessee was inadmissible, only then an adjustment under the said clause (iii) could be made. If proof in support of the claim was not furnished by an assessee, then for the lack of proof, no disallowance or an adjustment could be made. The only option which was open to the Assessing Officer, in such a case, was that he could require the assessee to furnish proof in which case he would presumably have to issue notice under section 143(2)"

In light of the above judicial pronouncements and settled law on the issue coupled with the facts of the case, as mentioned herein above, I am fully in agreement with the pleadings of the ld. Counsel of the appellant and I direct the Assessing Officer to rectify the order passed under section 143(1)(a) by deleting the adjustment of Rs..64,81,4611- made thereto. My findings are further, supported from the assessment order passed under section 144 of the Income Tax Act in which no additions were made' under section 43B of the Income Tax Act and the addition under section 37 was made on merits of the case and not because of the fact that prima facie bad debts claimed by the appellant were not allowable as deduction and In fact CIT(A) has allowed major portion thereof.”

4. The Revenue is now in appeal before us against the aforesaid findings of the ld.CIT(A). The ld. DR while carrying us through the impugned order contended that the AO made the aforesaid prima facie adjustments on the basis of observations of the auditor in the tax audit report in annexure 1 and 3. In annexure 1, the auditor’s report clearly mentioned the particulars of capital expenditure written off (debited under operational expenses). Since the assessee claimed capital expenditure in the profit and loss account, accordingly, the AO added back the amount while processing the return. Likewise the assessee did not furnish any information that the trade tax payable, professional tax payable, bonus and the provident funds were paid by the assessee on or

before the date stipulated under the relevant enactments. The ld. DR vehemently argued that these adjustments were contemplated within clause (1)(a) of sec. 143 of the Act and the ld. CIT(A), without analyzing the facts of the case, deleted the adjustments nor demonstrated as to how these adjustments were debatable and controversial.

5. On the other hand, the ld. AR on behalf of the assessee submitted that since the assessee did not add back the capital expenditure written off or the other amounts like trade tax payable, professional tax payable, bonus, employee’s contribution towards the PF , the AO made these adjustments. While relying upon decisions in CIT vs. Amitabh Bachan Corporation Ltd.,261 ITR 45 (Bombay);CIT vs. Modi spinning & Weaving Mills Co. Ltd.,258 ITR 65 (Delhi);SRF Charitable Trust vs. Union of India & Others,193 ITR 95 (Delhi); and Shriram Honda Power Equipment Ltd. vs.CIT & Another,258 ITR 1(Delhi), the ld. AR supported the findings of learned CIT(A).

6. We have heard both the parties and gone through the facts of the case. As is apparent from the facts of the case , the AO while processing the return u/s 143(1)(a) of the Act on 16.3.99 made the aforesaid adjustments on the basis of information provided in the tax audit report, annexed with the return. Before proceeding further, we may have a look at the relevant extant provisions of sec. 143(1)(a) of the Act, which read as under:-

"143. (1)(a) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, -

 (i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under section 156 and all the provisions of this Act shall apply accordingly; and

(ii) if any refund is due on the basis of such return, it shall be granted to the assessee:

Provided that in computing the tax or interest payable by, or refundable to, the assessee, the following adjustments shall be made in the income or loss declared in the return, namely:--

(i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified;

(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed;

(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."

6.1 It is evident from the aforesaid provisions that unless the return or the accompanying documents or accounts show that the deduction, allowance or relief claimed therein is prima facie inadmissible on the basis of information available in the said documents, such deduction or allowance claimed cannot be disallowed. Only those adjustments can be made under the said clause which on the basis of return and documents accompanying it are "prima facie" inadmissible. Hon’ble jurisdictional High Court in S. R. F. Charitable Trust v. Union of India [1992] 193 ITR 95, held that in a way clause (iii) of the first proviso to section 143(1)(a) is analogous to section 154 of the Act. It was also observed that where it is evident from the return along with the documents in support thereof that the claim of the assessee is inadmissible, only then an adjustment under the said proviso can be made. As an illustration, it was pointed out that if, in a case, proof in support of the claim was not furnished by an assessee, then for the lack of proof, no disallowance or an adjustment could be made under the said provision and the only option left to the Assessing Officer in such a case was to require the assessee to furnish proof by issuing a notice under section 143(2) of the Act. It is also well established that the question of prima facie adjustment under section 143(1)(a) of the Act has to be considered with reference to the date on which the return of income is filed and not with reference to events subsequent thereto. A similar view was taken in Modi spinning & Weaving Mills Co. Ltd.(supra) while holding that if no proof in support of a claim was available with the Income-tax Officer, he could have issued a notice under section 143(2), but he could not have unilaterally made this disallowance by seeking to invoke the provisions of the first proviso to section 143(1)(a) of the Act.

6.2 Hon’ble jurisdictional High Court in their decision in Shriram Honda Power Equipment Ltd(supra )while interpreting proviso to sec. 143(1)(a) of the Act concluded as under:

“We are, therefore, of the considered opinion that under section 143(1)(a) of the Act it is not open to the Assessing Officer to make any adjustment in the returned income by disallowing any claim for deduction, allowance or relief, unless he is satisfied on the basis of information available in the return, documents, and the accounts accompanying it that such a claim is inadmissible on the face of it and there is no possibility of any debate thereon on such claim, etc. If anything more is read into the power of the Assessing Officer to make unilateral adjustments, it would render the provision wholly arbitrary and unreasonable because: (a) a disallowance is made without giving an opportunity to the assessee to explain his view point in support of the deduction or allowance, and (b) additional tax on the increased amount is charged from him arbitrarily. This would not only be in total violation of the principles of natural justice, it will also be not in consonance with the spirit of the provision to cause minimum inconvenience to the assessee and at the same time put the assessee on guard against claiming inadmissible deductions and allowances. On the contrary, the above interpretation of section 143(1)(a) of the Act will not cause any prejudice to the Revenue. In a given case where the Assessing Officer has any doubt about the allowability of deduction or claim made by the assessee, it is open to him to issue a notice under subsection (2) of section 143 and have the evidence in support thereof. Similar view have been expressed on the subject by the Bombay High Court in Khatau Junkar Ltd. v. K. S. Pathania [1992] 196 ITR 55, the Calcutta High Court in Modern Fibotex India Ltd. v. Dy. CIT [1995] 212 ITR 496, the Karnataka High Court in God Granites v. Under Secretary, CBDT [1996] 218 ITR 298 and some other High Courts as well. “

6.3 Hon’ble Bombay High Court in Amitabh Bachan Corporation Ltd.,(supra) held that whether an expenditure was on revenue account or capital account is required to be examined in the light of the totality of all facts for this purpose. Evidence would be required in the form of documents and accounts and that, by merely looking at the balance-sheet and profit and loss account, one cannot infer the nature of the expenditure. Accordingly, relying upon their decision in Khatau Junkar Ltd. [1992] 196 ITR 55 ,Hon’ble High Court concluded that such an exercise generally cannot be done by way of adjustments to the returns under section 143(1)(a) of the Act.

6.4 In view of the foregoing, following the view taken in the aforesaid decisions ,especially when neither proof in support of a claim can be requisitioned nor nature of expenditure can be judged in proceedings u/s 143(1)(a) of the Act, we have no basis to interfere with the findings of the ld. CIT(A). Therefore, ground no.2 in the appeal is dismissed.

7. Ground no.1 in the appeal being general in nature, does not require any adjudication while no additional ground having been raised before us in terms of residuary ground no.3 in the appeal, accordingly both these grounds are dismissed.

8. No other plea or argument was made before us.

9. In the result, appeal is dismissed.

Order pronounced in open Court

                                                       Sd/-                             Sd/-

                                               (C.M. GARG)           (A.N. PAHUJA)

                                      JUDICIAL MEMBER ACCOUNTANT MEMBER

NS

Copy of the Order forwarded to:-

1. Assessee

2. Assistant CIT, Cent ral Ci rcle-6,Room no.334, ARA Centre, Jhandewalan Extension,New Delhi

3. CIT concerned

4. CIT(Appeals)-I, New Delhi.

5. DR, ITAT,’H’ Bench, New Delhi

6. Guard File.

By Order,

Deputy/Asstt.Registrar

ITAT, Delhi