Change of "Previous Year" u/s 3(4) of Income Tax Act. - Income Tax - 1002/CBDT

INSTRUCTION NO. 1002/CBDT Dated : August 26, 1976 Section(s) Referred: 3(4) ,263 Statute: Income - Tax Act, 1961 A case has come to the notice of the Board wherein a consent accorded by an I.T.O. to a Limited Co. for the change of its "Previous Year" u/s 3(4) of the I.T. Act from the year ending 31st March, 1976 to an year ending 30th June, will result in a substantial loss of revenue. As a result of the change in the "Previous Year", the entire income of the company for the period from 1st April 1975 to 30th June 1976 will become assessable for the assessment year 1977-78. This would enable the company to skip over the assessment for the assessment year 1976-77 and also to defer its liability to pay advance tax for the said year. 2. As, by virtue of the change in the "Previous Year", the company's profits of the financial year 1975-76 will become assessable for the assessment year 1977-78, it would be in a position to avail of the concessions of reduction of surcharge and surtax liabilities in respect of the assessment year 1977-78 u/s 2 (8) and 29(a) of the Finance Act 1976. The surcharge liability can be avoided by the company by making a deposit of an equivalent amount with the Industrial Development Bank of India. The Company would also be entitled in its surtax assessment for the assessment year 1977-78 to a higher 'Statutory Deduction' of 15% of its capital basis, as against 10% admissible in respect of the assessment year 1976-77. Apart from these tax benefits the Company would not be liable to pay any advance tax during the financial year 1976-77 except in the profits of the period from 1st April 1976 to 30th June 1976 and the shortfall, if any, in its payment of advance tax during the financial year 1975-76 in relation to its profits for the period from 1st April 1975 to 31st March 1976. This is a substantial and unwarranted benefit at the cost of the exchequer. 3. U/S 3(4) of the I.T. Act, 1961, an assessee can change its previous year in respect of a business or profession with the consent of the Income -tax Officer, upon such conditions as the Income-tax Officer may think fit to impose. In this connection, the Board had issued certain instructions contained in C.B.R. Circular No. 14 of 1931 (R.DIS. No. 355 It/31, dated 27th November 1931 published in Income-tax Circulars Bulletins 1st April 1922 to 31st March 1955-Vol.1 page 22) and No. 165/3/71-IT(AI), dated the 1st May, 1971, for the guidance of the field officers. In para. 5 of the old circular of 1931, it has been given permission to change the accounting period and satisfy themselves that the assessee is not attempting to make use of the device of changing his accounting period in a manner that would cause serious detriment to the revenue. It is further laid down that where an application had been made with the object of causing loss to the revenue, the I.T.O. should submit the case to the Commissioner and obtain his orders thereon. 4. Commissioners are therefore, requested to review such cases where consents given by the I.T.Os. from 1st September 1975 onwards, involve loss of revenue (including undue deferment of payment of advance tax). Wherever necessary, action may be taken by the Commissioners of Income-tax u/s 263 to cancel the consent of the Income-tax Officer if it found to be prejudicial to the revenue. 5. In order to avoid undue loss to revenue due to a change in the previous year, instructions may be given to the Income-tax Officers that while dealing with applications for a change in the previous year they should invariably work out the tax effect (including escapement or deferment of advance tax payments) and obtain the prior approval of the I.A.C. u/s 144-A of the Income-tax Act, 1961 where the total tax effect is more than Rs. 50,000/-.