2004 (4) TMI 274 - AT - Income Tax

Validity of re-assessment proceedings u/s 147 - Income Escaping Assessment - HELD THAT -Admittedly, there is divergence of opinion on the issue whether deduction can be allowed against the incentive bonus received by the Development Officer employed with an insurance company. Majority of the High Courts i.e. High Courts of Punjab Haryana, Rajasthan, Orissa, Andhra Pradesh, Madras and Bombay have taken the view that such incentive is part of salary and therefore, no deduction can be allowed against such incentive except standard deduction. On the other hand, Gujarat High Court has dissented from such view by holding that profits in lieu of salary u/s 147 would include net profits and not the gross receipts and, therefore, assessee is entitled to deduction on account of expenditure in earning of such incentive. Various benches of the Tribunal in the past had also accepted such stand of the assessee and the High Court had refused to interfere with the finding given by the Tribunal. The issue is still pending before the Supreme Court and there is no judgment of Allahabad High Court which is the jurisdictional High Court in the case of the assessee. Hence, there was no finality of the issue as far as the present assessee is concerned. No direct judgment on this issue has been brought to our notice by either of the parties. However, we find three judgments of Supreme Court which are nearer to such issue. The first judgment is in the case of CIT v. Simon Carves Ltd. 1976 (8) TMI 4 - SUPREME COURT . In that case, the assessee was a non-resident company carrying on the business as construction engineers. The income of assessee was computed by applying one of the methods provided in Rule 33 of Income-tax Rules, 1922 at Rs. 16,16,005. Subsequently, the Assessing Officer re-opened the assessment under section 147(b) and re-computed the income at Rs. 64,51,933 by applying the other method permissible. The appellate authority held that re-assessment was not valid. Finally, the matter reached Supreme Court. Their Lordships defined the scope of expression 'escaped assessment' used by the legislature in section 147(b) (prior to amendment) by holding as under In the present case, at the time when the returns were filed by the assessee, there was divergence of opinion among the various High Courts. Further, there was no judgment of jurisdictional High Court. The dispute is still pending before the Apex Court. The claim of assessee was in accordance with one of the views expressed by High Courts. The same was also accepted in three assessment years. In two assessment years, the Assessing Officer made certain adjustments but the same were deleted by the Tribunal by holding that such adjustments could not be made by Assessing Officer. In view of the same and the judgments discussed above, the assessments under section 143(1) could not be said to be erroneous and consequently, it cannot be said that there was escapement of income. We hold accordingly. Consequently, the orders of CIT(A) as well as the orders of Assessing Officer under section 147 are hereby quashed. In the result, all appeals of assessee are allowed.

Summary

Issues Involved:
1. Validity of re-assessment proceedings u/s 147.
2. Whether there was escapement of income.

Summary:

Validity of Re-assessment Proceedings u/s 147:
The main issue in these appeals was the validity of re-assessment proceedings initiated u/s 147. The assessee, a Development Officer with LIC of India, had deducted 40% of incentive bonus as expenditure in his income computation. Initially, no disallowance was made by the Assessing Officer u/s 143(1) for assessment years 1998-99, 1999-2000, and 2000-2001, while such deductions were disallowed for assessment years 1995-96 and 1997-98 but were deleted in appeal. Subsequently, based on the Accountant General's objection citing CBDT instruction No. 1774, the Assessing Officer issued notices u/s 148 for re-opening the assessments. The Tribunal rejected the first contention of the assessee that re-assessment proceedings could not be initiated on the basis of audit objections, stating that the amended provisions of section 147 effective from 1-4-1989 authorize the Assessing Officer to re-open assessments if there is reason to believe that income chargeable to tax had escaped assessment, without the condition of 'information' as required in the old provisions.

Escapement of Income:
The second contention was whether there was escapement of income. The Tribunal noted that there was a divergence of opinion among various High Courts on whether deductions could be allowed against incentive bonuses received by Development Officers. Majority of High Courts held that such incentive is part of salary and no deduction is allowed except standard deduction, while the Gujarat High Court allowed deductions. The Tribunal observed that the original assessments were in accordance with one of the possible views and accepted by the Assessing Officer u/s 143(1). Citing Supreme Court judgments in CIT v. Simon Carves Ltd., CIT v. G.M. Mittal Stainless Steel (P.) Ltd., and Malabar Industrial Co. Ltd. v. CIT, the Tribunal held that if the original assessment is in accordance with one of the possible views, it cannot be said that income escaped assessment. Consequently, the Tribunal quashed the orders of CIT(A) and the Assessing Officer u/s 147, allowing the appeals of the assessee.