2003 (4) TMI 14 - HC - Income Tax

1. Whether, in view of the fact that the assessee had failed to create the reserve before the closing of the accounts and drawing of the profit and loss account, the assessee was entitled to the benefit of section 80HHC? - 2. Whether, Tribunal is right in law in holding that the assessee had created the requisite reserve envisaged in the proviso to section 80HHC in its amended accounts in relation to the previous year in respect of which deduction was claimed by it and are not such creation of reserve and amendment of accounts impermissible and against the law? we are of the view that the matter has to be remitted to the Tribunal for fresh consideration

Summary

Issues:
1. Interpretation of section 80HHC of the Income-tax Act regarding the creation of a reserve before finalization of profit and loss account.
2. Validity of amending profit and loss account after approval by the annual general body meeting.
3. Application of the Department of Company Law Affairs' clarification on reopening profit and loss accounts under special circumstances.

Analysis:
1. The case involved the interpretation of section 80HHC of the Income-tax Act concerning the creation of a reserve before finalization of the profit and loss account. The Revenue contended that the assessee failed to create the reserve as required by the proviso to section 80HHC. The senior counsel argued that the reserve should have been created before finalization of the profit and loss account, emphasizing the mandatory nature of this requirement. The appellate authorities had erred in allowing the claim under section 80HHC without considering the validity of reopening the profit and loss account after finalization.

2. The respondent-assessee argued that section 80HHC does not specify a specific period for debiting the eligible amount in the profit and loss account or creating a reserve. They contended that reopening the profit and loss account, even after approval by the general body, is permissible under company law for technical reasons. The counsel referenced decisions from various High Courts to support the argument that amendments to the profit and loss account can be made before the completion of the assessment.

3. The dispute also revolved around the application of the Department of Company Law Affairs' clarification on reopening profit and loss accounts under special circumstances. The Department argued that the profit and loss account cannot be reopened after finalization or only before finalization of the assessment. In contrast, the respondent-assessee relied on the Department's clarification, stating that the profit and loss account can be reopened for technical requirements even after approval by the general body. The Tribunal primarily relied on the circular from the Department of Company Law Affairs but failed to assess whether the situation in the case met the requirements of the clarification.

In conclusion, the High Court declined to answer the questions referred and remitted the matter to the Tribunal for fresh consideration. The Court emphasized the need for a thorough examination of whether the assessee's case satisfied the requirements of the Department of Company Law Affairs' communication and the legal principles governing such situations. Both parties were given the opportunity to present their arguments regarding the binding nature of the communication during the fresh disposal of the matter.