1968 (9) TMI 3 - SC - Income Tax

Provisional assessment of the tax u/s 141 - against the income returned by the company AO allowed deduction as loss carried forward from the earlier years and made a demand as tax provisionally due - penalty for default in compliance with the demand - action of AO is not justified - Assessee s appeal allowed

Summary

Issues Involved:
1. Provisional assessment under Section 141 of the Income-tax Act, 1961.
2. Set-off of losses from previous years.
3. Demand for additional tax and advance tax.
4. Validity of provisional assessments and related orders.

Issue-wise Detailed Analysis:

1. Provisional Assessment under Section 141 of the Income-tax Act, 1961:
The court examined the scope and nature of provisional assessments under Section 141. It was emphasized that the Income-tax Officer (ITO) is authorized to make a provisional assessment based solely on the return filed under Section 139 and accompanying documents. The assessment is summary and does not necessitate an enquiry or hearing. The ITO is not obliged to verify the claims made in the return but must apply the tax rates and allowances as per the Finance Act operative for the assessment year. The court clarified that provisional assessments are not binding and are subject to adjustment upon final assessment. Appeals against provisional assessments are expressly prohibited.

2. Set-off of Losses from Previous Years:
The company claimed the right to set off aggregate losses from previous years against the income for the assessment year 1963-64. The court noted that the losses claimed by the company were higher than those determined by the ITO, and appeals were pending for those assessments. The court discussed Sections 72 and 80 of the Income-tax Act, which govern the carry-forward and set-off of business losses. It was held that losses must be determined in pursuance of a return filed under Section 139 to be eligible for carry-forward. The ITO is mandated to give effect to certified losses under Section 141(2), but cannot adjudicate disputed claims during provisional assessment. The court concluded that the ITO should not have rejected the company's claim for carrying forward and setting off losses provisionally.

3. Demand for Additional Tax and Advance Tax:
For the assessment year 1964-65, the company returned a profit and claimed a set-off for previous losses but was assessed additional tax by the ITO without allowing the claimed deductions. The court found this provisional assessment erroneous as the ITO should have considered the company's claims. Similarly, for the assessment year 1965-66, the ITO demanded advance tax based on the provisional assessment of 1964-65. The court ruled that since the provisional assessment for 1964-65 was invalid, the demand for advance tax for 1965-66 was also invalid.

4. Validity of Provisional Assessments and Related Orders:
The court disagreed with the High Court's view that provisional assessments should adhere strictly to the provisions of the Act, akin to regular assessments. The court emphasized that provisional assessments are meant to expedite tax collection based on admitted income and should not involve adjudication of disputed claims. The provisional assessments for the years 1963-64 and 1964-65, and the related demand for advance tax for 1965-66, were deemed invalid. Consequently, the orders of provisional assessment and the demand for advance tax were set aside.

Conclusion:
The appeals were allowed, and the orders of the High Court were set aside. The provisional assessments for the years 1963-64 and 1964-65, along with the demand for advance tax for the year 1965-66, were invalidated. The penalty order for the year 1963-64 was also quashed. No costs were awarded in these appeals.