2008 (2) TMI 469 - AT - Income Tax

Summary

Issues Involved:
1. Permissibility of disallowance under section 43B by way of prima facie adjustment while processing the return under section 143(1)(a).
2. Correctness of the disallowance of sales tax liability converted into a loan.

Detailed Analysis:

1. Permissibility of Disallowance under Section 43B by Way of Prima Facie Adjustment While Processing the Return Under Section 143(1)(a):

The core issue for consideration was whether the outstanding sales tax liability could be disallowed as a prima facie adjustment while processing the return under section 143(1)(a). The CIT(A) concluded that the disallowance made while processing the return under section 143(1)(a) was not correct, as the deferred sales tax liability had been converted into a loan repayable after ten years without interest. The Tribunal upheld the CIT(A)'s decision, noting that the disallowance was beyond the scope of prima facie adjustments permissible under section 143(1)(a). The Tribunal cited the Bombay High Court decision in Khatau Junkar Ltd., which held that disallowances under section 143(1)(a) could only be made if the claim was prima facie inadmissible based on the material before the Assessing Officer.

2. Correctness of the Disallowance of Sales Tax Liability Converted into a Loan:

The Tribunal examined whether the sales tax liability of Rs. 31,29,350 for the period ending 31-3-1994 could be disallowed under section 43B when the amount was shown as a loan under the Deferment Scheme of the Sales Tax Department. The CIT(A) found that the eligibility certificate for the deferment was issued on 1-3-1994, within the relevant assessment year, and concluded that there was no justification for disallowance under section 43B. The Tribunal agreed with this conclusion, noting that the conversion of the sales tax liability into a loan was supported by necessary evidence on record.

Separate Judgments Delivered:

- Judicial Member's View:
The Judicial Member upheld the CIT(A)'s decision, emphasizing that the substantial issue was the permissibility of the disallowance by way of adjustment under section 143(1)(a). The Judicial Member cited the Supreme Court decision in Hindustan Electro Graphites Ltd., which held that the correctness of the claim should be assessed based on the law as it stood at the time of filing the return. The Judicial Member also noted that the issue was debatable and beyond the scope of prima facie adjustments permissible under section 143(1)(a).

- Accountant Member's View:
The Accountant Member disagreed, arguing that the deduction should be allowed based on the date of permission for conversion as specified in CBDT Circular No. 674, dated 29-12-1993. The Accountant Member noted that the permission for conversion was communicated on 28-6-1995, after the relevant assessment year, and therefore the deduction was not allowable for the assessment year 1994-95. The Accountant Member concluded that the assessee was not entitled to the deduction under section 43B.

- Third Member's Decision:
The Third Member agreed with the Judicial Member, finding that the matter was debatable and beyond the scope of prima facie adjustments under section 143(1)(a). The Third Member noted that the eligibility certificate for the deferment was issued within the relevant assessment year and that the conversion into a loan was supported by evidence. The Third Member also emphasized that additional tax, which bears the characteristics of a penalty, should not be imposed when there was no default at the time of filing the return, as per the Supreme Court decision in Hindustan Electro Graphites Ltd.

Conclusion:

The appeal of the revenue was dismissed, and the Tribunal upheld the CIT(A)'s decision that the disallowance under section 43B was not permissible as a prima facie adjustment while processing the return under section 143(1)(a). The Tribunal found that the sales tax liability converted into a loan was correctly claimed by the assessee and supported by necessary evidence.