1987 (1) TMI 174 - AT - Income Tax

Summary

Issues Involved:

1. Whether the learned AAC erred in directing the ITO to allow weighted deduction under section 35B of the Income-tax Act, 1961, in respect of inspection charges amounting to Rs. 15,737.
2. Whether rule 6AA of the Income-tax Rules, 1962, is procedural or substantive in nature and its applicability to pending assessments.

Issue-wise Detailed Analysis:

1. Whether the learned AAC erred in directing the ITO to allow weighted deduction under section 35B of the Income-tax Act, 1961, in respect of inspection charges amounting to Rs. 15,737:

The appellant revenue challenged the first appellate order dated 21-3-1983, wherein the learned AAC directed the ITO to allow weighted deduction under section 35B of the Income-tax Act, 1961, in respect of inspection charges amounting to Rs. 15,737. The assessee, a registered firm following the mercantile method of accounting, claimed this deduction which was initially disallowed by the ITO. The ITO's disallowance was based on the observation that rule 6AA of the Income-tax Rules, 1962, had not come into force until 1-8-1981 and was substantive rather than procedural, thus not applicable to pending assessments.

The learned AAC, however, was convinced by the assessee's argument that rule 6AA was retrospective and applicable to all pending assessments, thus directing the ITO to allow the deduction. The revenue, in their appeal, argued that rule 6AA was substantive and not retrospective, hence not applicable to the assessment year 1980-81.

2. Whether rule 6AA of the Income-tax Rules, 1962, is procedural or substantive in nature and its applicability to pending assessments:

The core of the dispute revolved around whether rule 6AA, which became effective from 1-8-1981, was procedural or substantive. The revenue contended that rule 6AA conferred certain rights and was substantive, thus not applicable to assessments before its effective date. They cited paragraph 6 of Kanga and Palkhiwala's Law and Practice of Income-tax to support their interpretation.

The assessee, on the other hand, argued that rule 6AA was procedural and should apply to all pending assessments, referencing the Special Bench decision in Biju Patnaik v. WTO, which held rule 1BB of the Wealth-tax Rules, 1957, to be retrospective.

The Tribunal thoroughly examined the language of section 35B(1)(b)(ix), noting that the relief was only allowable after the prescribed activities were defined by the authorities, which occurred with the introduction of rule 6AA on 1-8-1981. The Tribunal referred to the Special Bench decision in J. H. & Co. v. Second ITO, which emphasized that sub-clause (ix) did not become operative until prescribed by the rule-making authority.

The Tribunal concluded that since rule 6AA was introduced on 1-8-1981, any claim for periods prior to this date was not covered under section 35B(1)(b)(ix). Thus, the assessee's accounting period ending on 31-3-1981 did not qualify for the deduction, and the ITO's disallowance was upheld, overturning the AAC's decision.

Separate Judgments:

Judicial Member's View:

The Judicial Member held that rule 6AA was substantive and not procedural, thus not applicable to assessments before its effective date. The ITO's disallowance was correct, and the AAC's order was based on a misconception of the legal position.

Accountant Member's View:

The Accountant Member disagreed, viewing rule 6AA as procedural and applicable to all pending cases as of 1-8-1981. He argued that section 35B was the substantive provision, and rule 6AA merely clarified the qualifying activities for deduction, thus applicable to all eligible cases decided after 1-8-1981.

Third Member's Decision:

The Third Member, resolving the difference of opinion, agreed with the Judicial Member, holding that rule 6AA was substantive and not procedural. Therefore, the weighted deduction under section 35B(1)(b)(ix) was not allowable for the period before 1-8-1981, supporting the ITO's original disallowance.

Conclusion:

The appeal by the revenue was allowed, restoring the ITO's original decision to disallow the weighted deduction under section 35B in respect of inspection charges amounting to Rs. 15,737 for the assessment year 1980-81.