2008 (9) TMI 871 - HC - Income Tax

Disallowance of carried forward unabsorbed depreciation and unabsorbed investment allowance - Held that - When the returns of income for the two years under consideration were filed and the returns taken up for processing under section 143(1)(a) of the Act there was no finality as to the true scope of the provisions of section 115J(2) of the Act so as to warrant disallowance of carried forward unabsorbed depreciation and unabsorbed investment allowance by reducing the figure on the basis of the only the Central Board of Direct Taxes circular. In the result, it is apparent that the respondent authorities could not have undertaken the exercise of disallowance of carried forward unabsorbed depreciation and unabsorbed investment allowance of earlier years by way of prima facie adjustment for the two years in question. Once that exercise was not permissible the consequential orders made under section 154 of the Act and section 264 of the Act cannot be sustained. Accordingly, intimations under section 143(1)(a) of the Act both dated July 8, 1992 (exhibits A and B), orders under section 154 of the Act dated September 22, 1992 (exhibits D and E), and order under section 264 of the Act dated December 31, 1992 (exhibit I), are hereby quashed and set aside.

Issues Involved:
1. Jurisdiction and validity of disallowance of carried forward unabsorbed depreciation and investment allowance under section 143(1)(a) of the Income-tax Act, 1961.
2. Legality of orders made under section 154 of the Act.
3. Validity of the revision order under section 264 of the Act.
4. Interpretation of section 115J(2) of the Act.
5. Scope of adjustments permissible under section 143(1)(a) of the Act.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of Disallowance under Section 143(1)(a):
The petitioner, a limited company, challenged the disallowance of carried forward unabsorbed depreciation and investment allowance for the assessment years 1988-89 and 1989-90 by way of prima facie adjustment under section 143(1)(a) for the assessment years 1990-91 and 1991-92. The court noted that the respondent authorities had acted without jurisdiction and contrary to the provisions of the Act by making such disallowances. The court emphasized that under section 143(1)(a), the permissible adjustments are limited to arithmetical errors or prima facie admissible or inadmissible claims based on the information available in the return, accounts, or documents accompanying the return.

2. Legality of Orders Made Under Section 154:
The petitioner's rectification applications under section 154 were rejected by the respondent on the grounds that no changes were required in the adjustments made to the returns of income. The court found that the respondent authorities had erred in law by relying on the CBDT circular to conclude that carried forward unabsorbed depreciation and investment allowance had to be restricted. The court held that the issue was highly debatable and could not be considered prima facie inadmissible, thereby making the orders under section 154 unsustainable.

3. Validity of the Revision Order Under Section 264:
The petitioner sought revision of the intimations under section 143(1)(a) and the orders under section 154 through applications under section 264. The respondent rejected these applications. The court scrutinized the decision-making process and found that the respondent authority had misinterpreted section 115J(2) of the Act. The court concluded that the revisional authority had erred in its interpretation and that the order under section 264 could not be sustained.

4. Interpretation of Section 115J(2):
The court examined the interpretation of section 115J(2), which pertains to the carry forward and set off of unabsorbed depreciation and investment allowance. The court observed that both the petitioner and the respondent had contrary interpretations of the provision. The court held that the plain meaning of section 115J(2) did not support the respondent's interpretation that set-offs allowed under MAT provisions should restrict the carry forward of unabsorbed depreciation and investment allowance.

5. Scope of Adjustments Permissible Under Section 143(1)(a):
The court analyzed the scope of adjustments under section 143(1)(a) and concluded that such adjustments are limited to arithmetical errors and prima facie admissible or inadmissible claims based on the return and accompanying documents. The court cited several precedents, including Khatau Junkar Ltd. v. K. S. Pathania and Gujarat Poly-Avx Electronics Ltd. v. Deputy CIT, to support its view that the issue at hand was debatable and not prima facie inadmissible. The court emphasized that the adjustments made by the respondent authorities exceeded the permissible scope under section 143(1)(a).

Conclusion:
The court quashed and set aside the intimations under section 143(1)(a), the orders under section 154, and the order under section 264. The court ruled that the respondent authorities had acted beyond their jurisdiction and had misinterpreted the provisions of the Act. The petition was allowed, and the rule was made absolute with no order as to costs.

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