MIDAS RUBBER (PVT.) LTD. VS COMMISSIONER OF INCOME-TAX
2000 P T D 748
[232 I T R 824]
[Kerala High Court (India)]
Before Mrs. K. K. Usha and N. Dhinakar, JJ
MIDAS RUBBER (PVT.) LTD.
versus
COMMISSIONER OF INCOME-TAX
Income-tax References Nos. 125 of 1992, 4 of 1994, 166 and 167 of 1995, decided on 27/10/1997.
(a) Income-tax---
----Previous year---Company---Surtax---Chance in previous year---Rejection of change on the ground that surtax liability would be affected---Rejection permissible ---Matter remanded to find out if in fact surtax liability would be adversely affected---Indian Income Tax Act, 1961, S. 3---Indian Companies (Profits) Surtax Act, 1964.
(b) Income-tax---
----Appeal to Appellate Tribunal---Powers of Tribunal---Rejection of application for change in previous year on the ground that liability for surtax would be adversely affected---Rejection upheld by Tribunal---Tribunal should not have entered a finding on its own that there would be such adverse effect---Calculation of surtax liability had to be made---Tribunal should remand matter to Assessing Officer--Indian Income Tax Act, 1961, S.255.
While considering a request for consent to change the previous year the assessing authority should not act arbitrarily. The power should be exercised in a judicial manner.
The Statement of Objects and Reasons attached to the Bill introducing the Companies (Profits) Surtax Act shows that it is the income of the assessee-company that is brought to tax under this enactment. Surtax is levied on chargeable profits of the previous year or years which have to be computed taking into consideration the total income of the assessee under the Income Tax Act, 1961. Therefore, it is very clear that the assessment of tax liability -under the Companies (Profits) Surtax Act, 1964, is integrally connected with the provisions of the Income Tax Act, 1961, regarding computation of total income. The term "previous year" is not defined under the Companies (Profits) Surtax Act, 1964, but section 2(9) of that Act provides that all other words and expressions used in that Act but not defined under it shall have the meaning as per the definition of the term under the Income-tax Act. Therefore, the definition of previous year under section 3 of the Income-tax Act has to be applied for the purpose of the Companies (Profits) Surtax Act, 1.964, also. If due to the change in the previous year, the surtax liability of the assessee is reduced, it will be a case where the Revenue is adversely affected. It cannot be treated as a remote effect. It is a direct consequence. If consent for change of previous year was denied under section 3(4) of the Income-tax Act for the reason that it would adversely affect the surtax liability, such an action would be reasonable:
Held, that, in the instant case, the order of the Tribunal would show that the surtax liability had been calculated first on the basis of the returns submitted by the assessee, then on the basis of the assessment made by the Income-tax Officer and thereafter on the basis of the view taken by the Commissioner of Income-tax (Appeals). It was not known from where the necessary figures were obtained in making such calculation. In order to finalise an assessment under the Companies (Profits) Surtax Act, 1964, it was necessary to get the details regarding capital, etc., which could not-be, in the normal course, part of the file of assessment under the Income Tax Act, 1961. The Tribunal should not have entered a finding on its own that there would be such adverse effect for the assessment year 1982-83. The Tribunal should have remanded the matter for the consideration of the Income-tax Officer. Apart from this, the Tribunal itself was not quite sure whether there would be such adverse effect on the Revenue for the subsequent years also: The Tribunal should have directed the Income-tax Officer to consider this aspect also after giving an opportunity to the assessee. '
CIT v. Travancore Titanium Products Ltd. (No. 1) (1993) 203 ITR 685 (Ker.); Rattan Lal Ved Prakash v. CIT (1983) 144 ITR 135~(All.) and Union of India v. J. K. Synthetics Ltd. (1993) 199 ITR 14 (SC) ref.
Joseph Marhas, Joseph Kodianthara and Markose Vellappally for the Assessee.
P. K. R. Menon and N. R. K. Nair for the Commissioner.
JUDGMENT
MRS. K. K. USHA, J.---These references ate at the instance of the assessee. income-tax Reference No. 125 of 1992 arises out of an order passed by the Income-tax Appellate Tribunal, Cochin Bench, in I. T. A. No.57/Coch of 1986 for the assessment year 1982-83. Income-tax Reference No.4 of 1994 arises out of the order in I.T.A. No. 1097/Cock of 1986 for the assessment year 1983-84. Subsequently pursuant to the directions issued by this Court in its judgment in O. P. Nos. 8066 of 1993 and 13307 of 1994 additional questions were referred by Tribunal for the abovementioned two years. These questions are covered by Income-tax References Nos. 166 and 16"7 of 1995. The following are the questions referred in Income-tax Reference No. 125 of 1992 for the opinion of this- Court:
"(1) Whether, on the facts and in the circumstances of the case, the finding of the Income-tax Appellate Tribunal that the order passed by the Commissioner of Income-tax on May 7, 1983, under section 264 is only a statement of law on the subject and it cannot be interpreted as going further than and the Income-tax Officer is entitled to pass an order rejecting the request for change of previous year, is vitiated in law inasmuch as it was based on facts and circumstances not apparent from the records and on suspicions, conjectures and surmises and irrelevant evidence?
(2) Whether, on the facts and in the circumstances of the case, there was any evidence on record to support the following findings:
(a) The following point stands out in bold relief on a perusal of the order of the Commissioner of Income-tax. If the order dated November 12, 1981, which was based on irrelevant material and which was passed without the Income-tax Officer applying his mind before withholding permission for the variation of the previous year is allowed to stand, the interest of the assessee could be prejudiced because the Income-tax Officer sitting in judgment over the assessment for the assessment year 1982-83 would be bound by the order of the previous Income-tax Officer, dated November 12, 1981:
(b) Therefore, the Commissioner of Income-tax concluded that the order, dated November 12, 1981, should not be allowed to remain in force and thus chose to set aside the order:
(c) Having thus set aside the order, the Commissioner of Income-tax apparently aware of the right of the assessee to furnish the return of income for any previous year as it likes. This awareness was within the knowledge of the Commissioner of Income-tax in view of the provisions of section 3(4) of the Income-tax Act;
(d) The law as laid down by the Allahabad High Court as reported in Rattan Lal Ved prakash v. CIT (1983) 144 ITR 135 is that for a change in the previous year, no prior consent of the Income-tax Officer is required. 'This the Commissioner of Income-tax was aware when he passed the order under section 264 of the Income-tax Act and that is why it would appear that he gave a carte blanche to file the return of income for any previous year as it .likes' ;
(e) The proportionate income for 12 months is Rs.40,12,668, the depreciation to be deducted is Rs.7,86,571, tax is Rs.19,84,060 and the chargeable profit is Rs.12,42,037 and surtax due is Rs.2,32,160; .
(f) The working furnished by the learned departmental representative as contained in sub-paragraph (b) above at our instance gives the correct computation of the income;
(g) In the case before us, the learned Income-tax Officer has applied his mind to the petition of the assessee and had come to the conclusion that there would be loss to the exchequer by way of surtax liability and such conclusion is based on material on record;
(3) Whether, on the facts and in the circumstances of the case, the finding of the Income-tax Appellate Tribunal that the order of the Commissioner of Income-tax under section 264 cannot be interpreted to mean that he had given direction to the income-tax Officer to accord sanction to the assessee for the change of the previous year and the direction is to consider the application afresh and in accordance with law is vitiated in law inasmuch as it was based on facts and circumstances not apparent from the records and on conjectures and surmises and irrelevant evidence?"
The question referred in Income-tax Reference No. 4 .of 1994 is as follows "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Income-tax Officer in refusing to accept the period from October 1, 1981, to September 30, 1982, as the previous year of the assessee, following its earlier order for the assessment year 1982-83?"
The following are the questions referred in Income-tax References Nos. 166 and 167 of 1995: '
"(1) Whether, on the facts and in the circumstances of the case the findings of the Income-tax Appellate Tribunal that the net chargeable profit for surtax purposes would come to Rs.6,56,35'7 and the surtax due would be of the order of Rs.2,32,160 and hence there was loss of revenue on account of change of previous year and the Income-tax Officer was justified in refusing to grant the change is vitiated in law inasmuch as it was based on an unsigned piece of paper purported to be showing the surtax liability which was handed over by the Departmental Representative at the time of hearing and which was not produced nor relied on before the lower authorities and by acting illegally and without jurisdiction in accepting the same?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the Income-tax Officer was justified in refusing to grant permission to change the previous year after accepting the finding of the Commissioner of Income-tax (Appeals) by holding in paragraph 12 that there may not be loss of revenue by way of income-tax?.
(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the acceptance of change of previous year by the assessing authority himself as evidenced by order for the assessment years 1986-87 and 1987-88 is not relevant for the assessment year 1982-83 and there cannot be a change of previous year for 1982-83?"
The relevant facts are as follows: The assessee is a company engaged in manufacture and sale of tread rubber. It also undertakes mixing and mastication of rubber. Its previous year ended on 30th June. In September, 1981, the assessee sought permission of the Income-tax Officer to close its accounts for a period of 15 months from July 1, 1980, to September 30, 1981. Against the order of the Income-tax Officer, dated November 12, 1981, rejecting the request, the assessee preferred a revision before the Commissioner of Income-tax, Cochin. The revisional authority set aside the order passed by the Income-tax Officer and allowed the assessee to file a return as it liked. It was further directed that while considering the assessment for the assessment year 1982-83 the Income-tax Officer should pass an order under section 3(4) of the Income-tax Act and thereafter finalise the assessment of income. Pursuant thereto, the assessee filed return of income for the assessment year 1982-83 for a period of 15 months from July 1, 1980, to September 30, 1981.
The Income-tax Officer while finalising the assessment rejected the request of the assessee for change of the previous year from June to September. After making necessary adjustments, the Income-tax Officer determined the total income of the assessee on proportionate basis for a period of 12 months ending 30th June, 1981. The Income-tax Officer took the view that if the change of previous year is allowed, the assessee would claim deduction for investment allowance and additional depreciation against the profit from 15 months which would substantially erode the assessable income of the assessee, which in turn have effect on the surtax liability of the assessee for the assessment year 1982-83. The Commissioner of Income-tax (Appeals) did not accept the above view. According to .him, the loss of revenue in a particular year on account of change in the previous year cannot be the sole criterion of refusing change of previous year. He took the view that the assessee being a limited company and the tax rates for the relevant year and the following years were more or less stable and the allowances such as investment allowance, depreciation, etc., are themselves statutory deductions which have to be allowed in the relevant year or next year, there would not be any substantial loss to the Revenue as apprehended by the Income-tax Officer. The first appellate authority also took the view that if the assessee had to pay surtax during the relevant year if the previous year was kept intact, it may not have any liability to pay surtax in the succeeding year on account of heavy investment allowance and depreciation charges. He also took the view that the apportionment of income has resulted in an unscientific division as between the two periods. The order of the Income-tax Officer was set aside with a direction to gram the assessee's request for change in the previous year and complete the assessment on the basis of the 15 months period.
The Revenue took up the matter in appeal before the Tribunal. A contention was raised by the assessee that the order passed by the Commissioner of Income-tax, under section 264 of the Income-tax Act, dated May 7, 1983, had the effect of permitting the assessee to change its previous year and, therefore, the Income-tax Officer had no authority to deny such change while finalising the assessment for the year 1982-83. The Tribunal did not accept this contention. It took the view that the Commissioner had only stated that the Income-tax Officer should consider the application afresh and in accordance with law at the time of finalising the assessment for the year 1982-83.
On the basis of a computation sheet filed by the departmental representative before the Tribunal at the time of hearing, the Tribunal took the view that there would not be any surtax liability for the assessment year 1982-83, if the assessee's request for change of the previous year is allowed and the surtax liability for subsequent years "may be either nil or a very low figure It also found that erroneous allocation of income between 12 months and 15 months by the assessing authority had resulted in excess assessment for the assessment year " 1982-83. Therefore, even though there was no quantum appeal at the instance of the assessee, the Tribunal directed the Income-tax Officer to have a second look at the determination of the income for the assessment year 1982-83 on the basis of the 12 months period and pass such orders as he may deem fit in accordance with law. According to the Tribunal, though it may be that because of the stable rates of taxes;? the case of companies, there may not be much loss to the Revenue by way of Income-tax, etc., the same cannot be said in respect of the surtax liability. Therefore, the Income-tax Officer was justified in refusing permission to change the previous year. A contention was raised by the assessee that for the subsequent year, viz., 1986-87 and 1987-88, the Income-tax Officer had accepted the previous year of the assessee as that ending on 30th September, and therefore, it cannot be argued that the assessee is not entitled to such change of previous year for the assessment year 1982-83. The above contention was rejected by the Tribunal on the ground that each year has to be taken as a separate unit of assessment. The order of the Commissioner of Income-tax (Appeals) for the year 1982-83 was thus set aside.
For the assessment year 1983-84, the assessee filed the return of income for a period of 12 months from October 1, 1981, to September 30, 1982, In view of his rejection of the assessee?s request for change of previous year from June 30, 1981, to September 30, 1981, the Income-tax Officer did not accept the return for the assessment year 1983-84 as submitted by the assessee. He took the view that profit for the period from July 1, 1982, to September 30, 1982, should be excluded. But he included the profit for the above period on the basis of the statement of account filed by the assessee as a protective measure. On appeal, the Commissioner of Income-tax (Appeals) following his order dated October 10, 1985, for the assessment year 1982-83 upheld the claim of the assessee to have new previous year. He, therefore, deleted a sum of Rs.1,38,199 being the profit relatable for the period from July 1, 1982, to September 30, 1982. The matter was taken in appeal before the Tribunal by the Revenue. The appeal was allowed by the Tribunal following its order for the year 1982-83.
The contention of the assessee before the Tribunal that it was not open to the assessing authority to deny permission to change the previous year from 30th June, September, 1981, in view of the order passed by the Commissioner of Income-tax under section 264 of the Income-tax Act was reiterated before this Court also. On examining the order passed by the Commissioner of Income-tax (Appeals) (sic) under section 264, the relevant portion of which is quoted in the statement of case, we are not persuaded to accept the contention of the assessee. After discussing the effect of the provisions contained under section 3(4) of the Income Tax Act, 1961, the Commissioner of Income-tax (Appeals) (sic) held as follows:
"7. The assessee's petition has much force in it. The Income-tax Officer has not applied his mind to section 3(4) of the Income-tax Act. Whether the assessee avoided the payment of advance tax for the assessment year 1979-80 is irrelevant. It could have been a factor to be taken into account while allowing a change in the previous year on the first occasion. The assessee cannot file a return of income for the year ending on June 30, 1981, unless the Income-tax Officer insists on the same. During the assessment proceedings under? section 143, the Income-tax Officer would not be able to take a fresh decision in view of the Income-tax Officer's order, dated November 12, 1981, on the subject of the previous year. It, therefore, seems appropriate to me that the Income-tax Officer's refusal, dated November 12, 1981, 0ould be set aside. The assessee is allowed to file a return as it likes. While deciding the assessment for the assessment year 1982-83, the Income-tax Officer should pass an order under section 3(4) of the Income-tax Act and thereafter finalise, the assessment of income."
We do not understand the above observation as a direction given to the Income-tax Officer to allow the prayer made by the assessee for changing the previous year. The assessee was permitted to file its return covering the period which it chose and the, Income-tax Officer was directed to pass an order under section 3(4) of the Income-tax Act while considering the assessment for the year 1982-83. Therefore, we find no merit in the contention of the assessee that the Income-tax Officer has erred in not granting the permission under section 3(4) in spite of a direction to that effect by the Commissioner of Income-tax (Appeals) (sic).
It was next contended by the assessee that any effect on the incidence of tax under the Companies (Profits) Surtax Act, 1964, is irrelevant in the matter of granting consent under section 3(4) of the Income Tax Act, 1961, to change the previous year. While considering a request for consent to change the previous year the assessing authority should not act arbitrarily, the power should be exercised in a judicial manner. According to the assessee, its request was only to change its previous year at par with its accounting year. It is submitted that the assessee had to maintaining the accounting year ending with September 30, for .the purpose of getting subsidies. The assessee had also added three more months in the assessment year 1982-83. Therefore, there is no question of any reduction in the quantum of tax that would be found payable by the assessee under the Income Tax Act, 1961. If one has to consider the effect of the change with reference to the tax liability for the purpose of granting permission to change the previous years, the assessee would submit that such effect can be only in respect of tax payable under the Income-tax Act and not under any other enactment.'. On the other hand, learned standing counsel for the Revenue would submit that the loss to the Revenue under the Companies (Profits) Surtax Act, 1964, is a relevant consideration while granting permission under section 3(4) to change the previous year. He submits that while income-tax is a tax on profit, surtax is a special tax on profits. According to him, loss to the Revenue can be loss of any tax which is correlated to the assessment under the Income-tax Act.
We find merit in the contention raised on behalf of the Revenue. In the Statement of Objects and reasons attached to the Bill introducing the Companies (Profits) Surtax Act, 1964, it is stated as follows (see (1964) 51 ITR (St.) 82):
"The object of this Bill is to impose a special tax on companies (other than those which have no share capital)-on their excess profits, namely, the amount by which the total income of a company as reduced by certain types of income and certain sums and the income-tax and super-tax payable by it exceeds a sum of ten percent. of its capital, reserves and certain borrowed moneys or a sum of Rs.2 lakhs, whichever is higher..."
The above would show that it is the income of the assessee-?company that is brought under tax undo: this enactment. Section 4 of the Companies (Profits) Surtax Act, 1964, which is the charging section reads as follows:
"4. Charge of tax.---Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964 but before the first day of April, 1988, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule."
'Chargeable profits' referred to in section 4 is defined under section 2(5) as follows:
'Chargeable profits' means the total income of an assessee computed under the Income Tax Act, 1961, (43 of 1961) for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule."
The above would, show that surtax is levied on its chargeable profits of the previous year or years which have to be computed taking into consideration the total income of the assessee under the Income Tax Act, 1961, and adjusting it in accordance with the provisions of the First Schedule. Therefore, it is very clear that the assessment of tax liability under the Companies (Profits) Surtax Act, 1994, is integrally connected with the provisions of the Income Tax Act, 1961, regarding computation of total income. The term "previous year" is not defined under the Companies (Profits) Surtax Act, 1964, but section 2(9) of the above Act provides that all other words and expressions used in that Act but not defined under it shall have the meaning as per the definition of the term under the Income-tax Act. Therefore, the definition of previous year under section 3 of the Income Tax Act, 1961, has to be applied for the purpose of the Companies (Profits Surtax Act, 1964, also. If due to the change in the previous year, the surtax liability of the assessee is reduced, it will be a case where the Revenue is adversely affected. It cannot be treated as a remote effect but it is a direct consequence, in view of the integral relationship between the tax liability under the Companies (Profits) Surtax Act, 1964, and the provisions of the Income Tax Act, 1961. We, therefore, hold that if consent for change of previous year was denied under section 3(4) of the Income Tax Act, 1961, for the reasons that it would adversely affect the surtax liability, such an action cannot be treated as unreasonable.
But in the present case the assessee has a contention that there were no materials before the Tribunal to come to the conclusion that the liability of the assessee under the Companies (Profits) Surtax Act, 1964, would be reduced for the assessment year 1982-83, if the previous year is changed. As far as the subsequent years are concern, even the Tribunal was not quit 'sure of the position as it had stated "the surtax liability for subsequent years may be either nil or a very low figure. Learned counsel for the assessee that the procedure adopted by the Tribunal in accepting certain work-sheets produced before the Tribunal by the departmental representatives at the time of hearing is not according to the rules and, therefore, such action has to be deprecated contends it. No reliance should have been made on the unsigned work-sheets produced at the time of hearing before the Tribunal. Learned counsel for the assessee pointed out that the Tribunal has not followed the procedure prescribed under rules 29 to 31 of the Income-tax (Appellate Tribunal) Rules, 1963, in accepting the above material.
This Court had occasion to consider the power of the Tribunal to admit additional evidence in CIT v. Travancore Titanium Products (No. 1) (1993) 203 ITR 685. This Court found that the procedure followed by the Tribunal in relying on the work-sheets without admitting them as additional evidence and without giving reasons as contemplated by rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, was irregular and the matter was sent back to the Tribunal for fresh consideration. Learned counsel appearing' on behalf of the Revenue contended that the finding of the Tribunal which is the final fact-finding authority has to be accepted by this Court on the question whether there will be loss to the Revenue during the relevant year.
We find merit in the contention raised by the assessee. A reference to the work-sheet which is quoted in the order of the Tribunal would show that the surtax liability had been calculated first on the basis of the returns submitted by the assessee, then on the basis of the assessment made by the Income-tax Officer and thereafter on the basis of the view taken by the Commissioner of Income-tax (Appeals). It is not known from where the necessary figures were obtained in making such calculation. In order to finalise an assessment under the Companies (Profits) Surtax Act, 1964, it is necessary to get the details regarding capital, etc., which could not be the normal course, part of the file of assessment under the Income Tax Act, 1961. While we agree with the Tribunal that any adverse effect on the tax liability tinder the Companies (Profits) Surtax Act, 1964, would be a justifiable reason to deny permission to change the previous year under section 3(4) of the Income Tax Act. 1961, we are of the view that it should no have entered a finding on its own that there would be such adverse effect for the assessment year 1982-83. The Tribunal should have remanded the matter for the consideration of the Income-tax Officer. Apart from the above, we find that the Tribunal itself was not quite sure whether there would be such adverse effect on the Revenue for the subsequent years also. The Tribunal should have directed the Income-tax Officer to consideration this aspect also after giving an opportunity to the assessee.
It is contended by learned counsel for the assessee that since the Department had accepted the change in the previous year for the subsequent years, viz., 1986-87 and 1987-88, the Tribunal should have directed the assessing authority to permit the assessee to change its. previous year for the years 1983-83 and 1983-84 also. Reliance was placed by learned counsel on a decision of the Supreme Court in Union of India v. J. K. Sunthetics Ltd. (1993) 199 ITR 14. We do not find that the above case is of any help to the assessee. The facts of the case considered by the Supreme Court were entirely different. It was a case where the Supreme Court did not express any opinion on the question decided by the High Court on the ground that if the order permitting change of the previous year for 1972-73 is cancelled at that stage, it would involve upsetting the assessments for over ten years and create undue hardship. In the present case no sanction was originally granted for change of the previous year and the Income-tax Officer on the correctness of the order passed the appeal that was being considered by the Tribunal. Therefore, there is no justification in finding the issue in favour of the assessee only for the reason that for the subsequent years 1986-87 and 1987-88, change in previous year was permitted.
In the light of the above, we answer question No. 1 in I.T.R. No.125 of 1992 in the negative, in favour of the Revenue and against the assessee. Questions Nos. 2(a) to (g) are not answered, as unnecessary in view of the answers given to other questions. We refuse to answer question No.3, as it is another fact of question No. 1. We refuse to answer the question in I.T.R. No. 4 of 1994 in view of the finding in this judgment that the Tribunal has to remand the matter to the Income-tax Officer for fresh consideration. We answer question No. 1 in I.T.R. Nos. 166 and 167 of 1995 in the affirmative, in favour of the assessee and against the Revenue. We refuse to answer question No. 2 in view of our answer to question No. 1 in I.T.R. No. 125 of 1992. Question No. 3 is answered in the affirmative in favour of the Revenue and against the assessee.
A copy of this judgment under the seal of this Court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Coching Bench.
M.B.A./3250/FC ??????????????????????????????????????????????????????????????????????????????? Reference answered.