2010 (8) TMI 252 - HC - Income Tax

Rectification of mistakes - Investment allowance it is therefore clear that under the provisions of the Act the assessee is entitled to create the reserve fund within the period of eight assessment years following the installation of the plant and machinery solong it had earned profits in any of the said subsequent assessment years - As the Assessing Officer in the present case had failed to so act there can be no manner of doubt that the order of the authorities dis-allowing investment allowance to the assessee for the assessment year inquest ion was not justified in law As the very approach of the Assessing Officer was contrary to the provisions of the Act the answer to the second question raised stands self-answered by our conclusions reached on the first question framed in the appeal Decided in favor of the assessee

Summary

Issues Involved:
1. Whether the Tribunal was justified and correct in law in holding that the adjustment of Rs. 27,94,275 made by the Assessing Officer declining the claim of investment allowance is not in order.
2. Whether the Tribunal was justified and correct in law in holding that the adjustment under section 32A of the Income-tax Act, 1961 while processing the return under section 143(1)(a) of the Act is outside the scope of the said provision.

Issue-wise Detailed Analysis:

Issue 1: Adjustment of Rs. 27,94,275 and Denial of Investment Allowance
The case revolves around the denial of an investment allowance claim amounting to Rs. 27,94,275 by the Assessing Officer (AO) for the assessment year 1990-91. The AO scrutinized the return under section 143(1)(a) of the Income-tax Act, 1961, and did not allow the claim on the grounds that the required pre-conditions under section 32A were not fulfilled. Consequently, the AO adjusted the claimed amount and recalculated the total loss as Rs. 55,88,315, imposing an additional tax of Rs. 3,01,782.

The assessee's subsequent rectification petition under section 154 was rejected, and the appeal to the Commissioner of Income-tax (Appeals) was also dismissed. The Commissioner upheld the AO's decision, stating that the investment allowance was rightly adjusted due to the failure of the assessee to create the requisite reserve as mandated by the Act.

However, the Income-tax Appellate Tribunal (ITAT) reversed these decisions, allowing the assessee's appeal. The Tribunal's decision was based on the provisions of section 32A, which detail the conditions for allowing investment allowance. Specifically, the Tribunal noted the amendments brought by the Finance Act, 1990, which clarified that the creation of the reserve fund was not mandatory in the year of installation if the assessee had a loss. The Tribunal's interpretation aligned with the legislative intent to mitigate the stringent requirements highlighted in the Supreme Court's decision in Shri Shubhlaxmi Mills Ltd. v. Addl. CIT [1989] 177 ITR 193.

The court concurred with the Tribunal, emphasizing that the amendments to section 32A allowed the creation of the reserve fund within eight assessment years following the installation of the plant and machinery. This interpretation was supported by the decision in CIT v. Raza Buland Sugar Co. Ltd. [1993] 202 ITR 191. Thus, the AO's approach was deemed contrary to the provisions of the Act, and the Tribunal's decision to reverse the primary authorities' orders was upheld.

Issue 2: Scope of Adjustment under Section 32A during Return Processing under Section 143(1)(a)
The second issue pertains to whether the adjustment under section 32A while processing the return under section 143(1)(a) was within the scope of the provision. The court's analysis concluded that the AO's action was not justified. The provisions of section 32A, as amended, clearly indicate that the investment allowance should be carried forward and allowed in subsequent years when profits are available, provided the reserve is created within the stipulated period.

Given that the AO's approach was fundamentally flawed, the Tribunal's conclusion that the adjustment under section 32A was outside the scope of section 143(1)(a) was correct. The court's findings on the first issue inherently addressed the second, affirming that the AO's denial of the investment allowance was not in accordance with the law.

Conclusion
The appeal was dismissed, and the Tribunal's decision was upheld. The court found that the AO's denial of the investment allowance and the subsequent adjustments were not justified in law, emphasizing the legislative amendments that allowed flexibility in creating the reserve fund within a specified period. The Tribunal's interpretation was aligned with the intent of the amendments, ensuring that the assessee's claim for investment allowance was valid.