1988 (3) TMI 150 - AT - Income Tax

Summary

Issues Involved:

1. Legality of the Commissioner's revision under Section 263.
2. Validity of the reopening of assessments under Section 147(a).
3. Admissibility of the provision for liquidated damages as a deduction.
4. Jurisdiction of the Commissioner to revise the IAC's order.

Issue-wise Analysis:

1. Legality of the Commissioner's Revision under Section 263:

The appeals contest the common order of the CIT passed under Section 263, dated 26th February 1986, which directed the IAC to continue reassessment proceedings for the years 1978-79 to 1981-82. The assessee argued that once the IAC had dropped the proceedings initiated under Section 147(a), there was no order that the Commissioner could revise under Section 263. The Tribunal referred to the case of Carborundum Universal Ltd. vs. ITO (1986) 17 ITD 305 (Mad), which distinguished between "dropping of proceedings" and "making of an assessment." It concluded that the IAC had made an assessment under Section 147, determining 'Nil Assessment' for each year, and not merely dropped the proceedings. Thus, the Commissioner's assumption that proceedings were dropped was incorrect.

2. Validity of the Reopening of Assessments under Section 147(a):

The ITO initiated action under Section 147(a) by issuing notices under Section 148 on 23rd February 1984, to bring to tax the amounts for which provisions had been made. The assessee contended that the IAC had reason to believe that no income had escaped assessment, and thus, the Commissioner could not substitute his judgment for the IAC's satisfaction. The Tribunal found that the IAC had made valid assessments under Section 147(a) for each year, issuing demand notices showing 'Nil Assessment.' Therefore, the reopening of assessments was valid.

3. Admissibility of the Provision for Liquidated Damages as a Deduction:

The assessee argued that the provision for liquidated damages was an accrued liability and an admissible deduction, citing a similar issue in their own case for the assessment year 1983-84, where the Tribunal had allowed the deduction. The Tribunal noted that the assessee had consistently made such provisions and adjusted them in subsequent years. The IAC had accepted the assessee's explanation and closed the proceedings, indicating that the provision was reasonable and based on accounting principles. Therefore, the provision for liquidated damages was admissible as a deduction.

4. Jurisdiction of the Commissioner to Revise the IAC's Order:

The Tribunal examined whether the Commissioner had the jurisdiction to revise the IAC's order under Section 263. It concluded that the Commissioner could examine the reasons given by the IAC for completing the assessments as 'Nil Assessments' and determine whether there was an error prejudicial to the Revenue. However, the Tribunal directed the Commissioner to proceed on the footing that there was an assessment made under Section 147(a) for each year, examine the reasons given by the IAC, hear the assessee, and then come to a conclusion. The Tribunal did not agree with the assessee's contention that there was no assessment, but it allowed the appeals for statistical purposes, directing the Commissioner to take a fresh decision in the matter.

Conclusion:

The appeals were allowed for statistical purposes, with the Tribunal setting aside the Commissioner's orders under Section 263 and directing a fresh examination of the IAC's reasons for the 'Nil Assessments.' The Tribunal upheld the validity of the reopening of assessments under Section 147(a) and the admissibility of the provision for liquidated damages as a deduction.