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Cit v. M/S Shree Ram Iron Foundry & Engineering Works - INCOME TAX REFERENCE No. 55 of 1998  RD-AH 1296 (10 May 2005)
INCOME TAX REFERENCE No.55 Of 1998.
Commissioner of Income-tax, Agra. Applicant
M/S Shree Ram Iron Foundry and Engineering Works, Agra. Respondent.
Hon'ble R. K. Agrawal, J.
Hon'ble Rajes Kumar, J.
The Income Tax Appellate Tribunal has referred the following question of law under section 256 (1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") relating to the assessment year 1990-91 for opinion to this Court.
"Whether the Hon'ble Tribunal was correct in upholding the action of the Ld. CIT (Appeals) in entertaining an appeal against an intimation under section 143 (1) (a) of the I.T.Act, 1961, treating it as an assessment order u/s 143 (3) and ignoring the provision of Section 246 of the Act as applicable to the year under consideration?"
The brief facts of the case are that the Assessing Authority while processing the assessee's return under section 143 (1) (a) of the Income Tax Act, 1961, carried out certain adjustments, including bonus ofRs. 50,480/- as relating to assessment year 1988-89, Rs.804/- towards house-tax as also Rs.1,158/- on account of sale difference between selling and distribution expenses besides an addition of Rs.3,750/- on account of donation. In appeal, the first appellate authority on a consideration of relevant facts and circumstances found no justification for additions of Rs.50,480/-, Rs.408/- and Rs.1,158/-, while confirming the addition of Rs.3,750/-. Feeling aggrieved by the order of the CIT (Appeals) the Revenue came up in appeal before the Tribunal. The Tribunal vide its order dated 21.3.1997 in the appeal upheld the action of the CIT (Appeals) by observing as under:
"We find that the AO went on to make various adjustments which be could not have done while processing the return under section 143 (1) (a) when in turn the assessee was required to be heard and assessment framed under section 143 (3). This is how the learned CIT (A) has treated the intimation dated 27.3.1991 u/s 143 (1) (a) and decided the appeal on merit. We do not find any infirmity in the approach of the learned CIT (Appeals) and also find no material on record justifying interference with the order of the learned CIT (Appeals) in allowing relief on merit."
We have heard the learned Standing Counsel appearing on behalf of the Revenue and Sri R.R. Agarwal, learned counsel appearing on behalf of the assessee.
Learned Standing Counsel submitted that the Tribunal has erred in entertaining the appeal against the order under section 143 (1) (a) of the Act while no appeal lies under section 246 of the Act against the order passed under section 143 (1) (a) of the Act. We do not agree with the submission of the learned Standing Counsel.
Section 143 of the Act deals with the assessment of income. Two kinds of procedure is provided therein. Section 143 (1) provides for assessment, without issuing any notice to the assessee, and gives a limited power to Income Tax Officer to rectify arithmetical mistakes and made prima facie adjustments only. Section 143 (3) empowers the Income-tax Officer to frame assessment after notice to the assessee and after making such inquiry as he deems fit.
A perusal of Section 143 (1), as it stood at the relevant time, shows that the Income-tax Officer without calling upon the assessee for production by him of any evidence in support of the return, may make assessment of total income or loss of the assessee after making such adjustments to the income or loss declared in the return as was required to be made under clause (b). The said assessment to the income or loss declared in the return is to be made with reference to the return and accounts and documents, if any, accompanying to it and also with reference to the past record of the earlier assessment years and determine the sum payable by the assessee or refundable to him on the basis of such assessment. The sub-clause (iv) of clause (b) of Section 143 (1) of the Act provides for the adjustments, as follows.
(i) Rectification of arithmetical errors in the return, accounts and documents,
(ii) Giving effect, on the basis of the regular assessments of past years, to the following:-
(a) Unabsorbed investment allowance under section 32 (2).
(b) Unabsorbed investment allowance under section 32 A (3) (ii).
(c) Unabsorbed development rebate under section 32 (2) (ii).
(d) Unabsorbed development allowance under section 33 A (2) (ii).
(e) Expenditure on scientific expenditure under section 35 (2) (ii).
(f) Expenditure on acquisition of patent rights and got rights under section
(g) Preliminary expenses under section 35-D (1).
(h) Prospecting expenses under section 35-E (1).
(i) Expenses on family planning etc. under section 36 (1) (ix) first proviso.
(j) Any loss carry forward under section 72 (1) or 73 (1) or 74 (1) or 74 (3)
or 74 A (3), and
(k) Any deficiency in "tax holiday" profits under section 80 J (3).
The record of the assessment of the assessee for the past years might be referred to only for the purposes of giving effect to the allowances referred to above.
Thus, it is clear that the adjustment, namely, incentive bonus of Rs.50,480/- relating to the assessment year 1988-89, Rs. 804/- towards house-tax as also Rs.1,158/- on account of sale difference between selling and distribution expenses besides an addition of Rs.3,750/- on account of donation were not such adjustment to the income permissible under section 143 (1) of the Act. In case, if such adjustment is made, order can only be treated as passed under section 143 (3) against which appeal was maintainable under section 246 of the Act. Similar question came up for consideration before the Division Bench of this Court in Income Tax Reference No.33 of 1992 Commissioner of Income Tax, Agra Versus Kay Kay Family Trust. In the said case, the Income Tax Officer has changed the status while passing the order under section 143 (1) (a) of the Act. Against the said order, appeal was entertained and the issue was decided. The question raised in the above case was that whether the order passed under section 143 (1) of the Act in which status was disputed, was appealable. This court held as follows:
"The upshot of the above discussion is that the income-tax officer is permitted to rectify arithmetical errors or mistakes and prima facie adjustments in the returns or the accounts and documents accompanying to it. He could allow any deduction, allowance or relief which, on the basis of the information available in the return, accounts and documents, was prima facie admissible but was not claimed. Similarly, he could disallow any deduction, allowance or relief claimed in the return, which on the basis of the information available in such return, accounts or documents was prima facie inadmissible. The present case does not fall in either of the above category. In view of the plain language of Section 143 (1) of the Act, change of status has not been provided as prima facie adjustment under section 143 (1) (a) read with section 143 (1) (b) of the Act, and the action of the Income Tax Officer under section 143 (1) was unjustified.
Thus, the necessary corollary of the above discussion is that the assessment in question made by the Income-tax Officer was beyond the scope of Section 143 (1). It is correct that the order purported to have been passed under section 143 (1), and it was beyond the four corners of the aforesaid section and such order was not appealable, at the relevant point of time. Such an order was not made appealable for the obvious reasons. The reason appears to be because of the limited nature of power to be exercised by the Income Tax Officer in such matters. Assessment orders passed under section 143 (3) were appealable. The basic difference is that the proceedings under section 143 (1) are summary in nature except making prima facie adjustments as provided therein, the disclosed income or loss is accepted as correct without calling upon the assessee while proceedings under section 143 (3) are also assessment proceedings but they are not summary proceedings. The Assessing Officer is entitled to assess the income or loss of an assessee inclusive of determination of correct status as per the material available on the record. Opportunity is also afforded to the assessee to establish its claim regarding allowances, deductions etc. by producing relevant accounts and documents. The proceedings under section 143 (3) are full fledged assessment proceedings there is no inhabitation or restriction on the power of the income-tax officer to assess the income. The validity of assessment order in question can be saved with reference to section 143 (3) as power to frame assessment is there. The Supreme Court in the case of State of Karnataka Versus Muniyalla AIR 1985 S.C. 470 has held " but it is now well settled that merely because an order is purported to be made under a wrong provision of law, it does not became invalid so long as there is some other provision of law under which the order could be validly made. Mere recital of a wrong provision of law does not have the effect of invalidating an order which is otherwise within the power of the authority making it."
At this juncture it is apt to notice one argument of the learned standing counsel who referred the Explanation to section 143 and submitted that in view of the Explanation I (f), the assessment under sub-section (1) shall be deemed to be incorrect, inadequate or incomplete in material respect, in the present case and the Income Tax Officer was justified to tax on the income of the assessee in correct status. He could refuse to accept the disclosed status, while framing the assessment under section 143 (1). He proceeded on the assumption that the Explanation clarifies the words inaccurate, inadequate or incomplete in material respect with reference to sub section (1) of Section 143. The argument is misconceived. These expressions do not find place under section 143 (1) but they could be find out under sub-section (2) of section 143. The scheme of section 143 confers power to pass a summary assessment order after rectifying the arithmetical mistake, allowances and deductions permissible under section 143 (1) of the Act. The said assessment order can be reopened on the application of an assessee filed within the period of one month under sub section 2 (a) of section 143. However, power has also been conferred on the Income-tax Officer to issue notice to an assessee whether or not an assessment has been made under sub section (1) to verify the correctness and completeness of the return by requiring the presence of the assessee under section 143 (2) (b) of the Act. When an income tax return should be treated as incorrect or inadequate or incomplete has been explained in the Explanation attached to section 143 of the Act and it is with reference to Section 143 (2). Therefore, the argument of the learned standing counsel that the exercise of power of passing the assessment order in question is referable to only section 143 (1) and not to 143 (3) of the Act is not correct. The Income-tax Officer is not required to pass summary assessment order under section 143 (1) if he is of the opinion that the return is incorrect or incomplete and in such circumstances he has to issue a notice under section 143 (2) of the Act.
In view of the conclusion that the assessment order was under section 143 (3) of the Act, the same was appealable under section 246 (1) of the Act and the appeal was rightly entertained by the Appellate Authority."
Respectfully, following the principle laid down by the Division Bench of this Court in the above case, we answer the question referred to us in the affirmative i.e. in favour of the assessee and against the Revenue.
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