2013 (7) TMI 653 - HC - Income Tax

Validity of Notice u/s 143(1)(a) - Prima facie Adjustment Held that - if the Assessing Officer wanted to reject any expenditure for want of proof/evidence he should have issued notice and called for the said evidence for deciding the question - the AO could not have made the said addition for want of documents - clause (iii) of the proviso was sought to be applied by the ITO. The procedure was not followed and the adjustment were made without notice The examples contained in the circular clearly show that, for want of proof, no disallowance or adjustment can be made - the adjustment made are not covered by the scope of section 143(1)(a) and as per the law expounded in S. R. F. Charitable Trust v. Union of India (1991 (10) TMI 38 - DELHI High Court) -It is only when a disallowance is evident from the facts on record that in adjustment can be made - the payments were made by the assessee before the due date of filing of the return and these aspects have not been denied and referred to by the AO appeal decided against revenue.

Summary

Issues Involved:
1. Quashing of the intimation dated April 4, 1990, under section 143(1)(a) of the Income-tax Act, 1961.
2. Quashing of the consequential orders rejecting the application for rectification concerning unpaid bonus and unpaid taxes.

Detailed Analysis:

1. Quashing of the intimation dated April 4, 1990, under section 143(1)(a) of the Income-tax Act, 1961:

Indian Drugs and Pharmaceuticals Ltd., a public sector undertaking, filed a writ petition to quash the intimation dated April 4, 1990, under section 143(1)(a) of the Income-tax Act, 1961. The petitioner argued that the intimation included adjustments that were not justified, specifically concerning unpaid bonus of Rs. 1,57,05,083 and unpaid taxes of Rs. 1,67,76,886. The Assessing Officer relied on the audit report paragraphs 7(a) and 7(d) to make these adjustments. However, the petitioner contended that the disallowance was made without indicating the relevant section or providing reasons for the disallowance.

2. Quashing of the consequential orders rejecting the application for rectification concerning unpaid bonus and unpaid taxes:

The petitioner also sought to quash the consequential orders passed by the Assessing Officer rejecting their application for rectification under section 154 of the Act. In the rectification application dated May 22, 1990, the petitioner provided a detailed explanation for the provision of bonus and unpaid taxes, emphasizing that the auditor's report did not contain any qualifications that would justify the disallowance.

Provision for Bonus:

The petitioner provided Rs. 1,59,00,702 for bonus in accordance with the Payment of Bonus Act, 1965. They argued that the disallowance of Rs. 1,57,05,083 was made without any legal basis or indication of the section under which it was disallowed. The petitioner further clarified that full details of the actual bonus paid were not initially available due to the geographical distribution of their offices but were subsequently provided during the rectification proceedings.

Unpaid Taxes:

The petitioner argued that the entirety of the unpaid taxes mentioned by the auditors was disallowed without proper consideration of the legal requirements or factual position. They pointed out that the payments related to sales tax, income-tax, professional tax, tax deducted at source, CPF, and ESI contributions, all of which had due dates falling after March 31. The petitioner contended that these payments, being statutory in nature, could at most be delayed but not avoided, and any difference of opinion should have been addressed by the Department with specific reasons.

Assessing Officer's Orders:

The first order under section 154 dated July 17, 1990, did not address the petitioner's contentions. The second order dated September 24, 1990, rejected the claims on the grounds that the petitioner did not enclose the necessary evidence with the return and that the certificates now filed could not be considered. The court found this reasoning legally unsustainable and contrary to the decision in S. R. F. Charitable Trust v. Union of India [1992] 193 ITR 95 (Delhi).

Legal Precedent:

The court referred to the decision in S. R. F. Charitable Trust, which held that adjustments under section 143(1)(a) could only be made if the inadmissibility of a claim was evident from the return and accompanying documents. The Income-tax Officer could not disallow a claim merely for lack of proof without issuing a notice under section 143(2) to call for the necessary evidence. The court emphasized that the adjustments made by the Assessing Officer were not covered by the scope of section 143(1)(a) and were made without following the proper procedure.

Conclusion:

The court concluded that the Assessing Officer's adjustments for unpaid bonus and taxes were not justified as they were made without proper notice and were not evident from the return and accompanying documents. The court allowed the writ petition, setting aside and quashing the intimation dated April 4, 1990, and the consequential orders. The petition was allowed to the extent indicated, with no order as to costs.