2004 (9) TMI 95 - HC - Income Tax

Weighted deduction Advance tax (interest) Draft assessment order - 1. Whether, Tribunal erred in law in holding that the assessee-company was entitled to weighted deduction under section 35B(1)(b) on expenditure incurred by way of sea freight amounting to Rs. 6,41,758? 2. Whether, Tribunal erred in law in expunging the portion of the order of the Income-tax Officer passed under section 143(3) read with section 144B which did not find place in the draft order forwarded to the assessee under section 144B and approved by the Inspecting Assistant Commissioner? - 3. Whether, Tribunal erred in law in not giving a finding on merits regarding chargeability of interest under sections 139(8) and 215?

Summary

Issues Involved:

1. Entitlement to weighted deduction under section 35B(1)(b) on sea freight expenditure.
2. Legality of expunging portions of the Income-tax Officer's order not included in the draft order.
3. Tribunal's omission to address the merits of interest chargeability under sections 139(8) and 215.

Issue-wise Detailed Analysis:

Question No. 2: Legality of Expunging Portions of the Income-tax Officer's Order

The facts are undisputed. The assessee filed its income return, which was later revised. The Income-tax Officer (ITO) proposed additions exceeding Rs. 1 lakh, invoking section 144B. The draft assessment order was forwarded to the assessee, who objected. The ITO then forwarded the draft and objections to the Inspecting Assistant Commissioner (IAC), who issued directions. The final assessment included remarks not in the draft order, which the assessee challenged.

The Appellate Assistant Commissioner (AAC) rejected the challenge, stating section 144B pertains only to income computation, not payable sums. The AAC held that tax computation follows income assessment, and interest calculation follows tax determination. Thus, interest orders could be independent and not part of the draft order. Similarly, penalty proceedings need not be in the assessment order but can be noted elsewhere.

The Tribunal disagreed, asserting that the ITO should indicate proposed interest levies and penalty proceedings in the draft order to avoid violating natural justice principles. The Tribunal expunged the ITO's remarks.

The Revenue's counsel supported the AAC's reasoning, while the assessee's counsel cited the Gujarat High Court's decision in CIT v. Maharaja Exhibitors, which upheld a similar challenge.

The court examined section 144B, noting its intent to avoid multiple proceedings and unnecessary appeals. The section allows the assessee to object to proposed income variations before a superior authority, reducing litigation and hardship. The draft order is not a final assessment but quantifies income or loss, and the ITO retains other powers during assessment, including interest levies and penalty proceedings.

The court held that the Tribunal's view, requiring draft order inclusion of interest and penalty proposals, was unsustainable. The assessee cannot object to such actions under section 144B, and the IAC cannot issue directions on these issues. The ITO's powers to levy interest and initiate penalties remain intact. The court dissented from the Gujarat High Court's interpretation in Maharaja Exhibitors.

The question was answered in favor of the Revenue.

Question No. 3: Tribunal's Omission to Address Merits of Interest Chargeability

This question arose from the Tribunal's failure to address the merits of interest chargeability under sections 139(8) and 215. The Tribunal had upheld the assessee's objection to the draft order's interest directions. The Revenue's counsel argued that the assessee could not appeal the interest levy on merits per the Supreme Court's ruling in Central Provinces Manganese Ore Co. Ltd. v. CIT.

The court noted that the Tribunal had not addressed the merits of the interest levy. Given the reversal of the Tribunal's findings on question No. 2, the Tribunal must now dispose of the assessee's challenge to the interest levy, considering the Supreme Court's judgment.

The question was answered in favor of the assessee.

Question No. 1: Entitlement to Weighted Deduction on Sea Freight Expenditure

The Tribunal allowed the assessee's claim for weighted deduction on sea freight, following its earlier order for the previous assessment year. The assessee's counsel noted that the earlier order was affirmed by the court in CIT v. Roadmaster Industries of India Pvt. Ltd.

Section 35B allows weighted deduction on specific expenditures incurred wholly and exclusively for certain purposes. Sub-clause (iii) excludes expenditure on the carriage of goods to destinations outside India. However, the court had previously upheld the assessee's claim under sub-clause (viii), which covers expenses for services outside India related to contract execution.

The court expressed doubts about the correctness of allowing sea freight expenses under sub-clause (viii) when explicitly excluded by sub-clause (iii). A general provision should not override a specific one. The court suggested this question be decided by a larger Bench.

The matter was referred to the Chief Justice for further orders.