Wealth Tax Act-Loss to revenue on account of change in previous year u/s 3(4). - Income Tax - 1700/CBDT

INSTRUCTION NO. 1700/CBDT Dated: February 27, 1986 Attention is invited to Board's Instruction No. 1002 dated 26th August, 1976 and Instruction No. 1341 dated 21st July, 1980 explaining the circumstances under which a change in the previous year allowed by an I.T.O. u/s 3(4) of the Income-tax Act, 1961 would lead to loss to revenue. 2. Cases of escapement of wealth-tax assessment on account of change of previous year allowed by ITO for income-tax purposes still continue to be pointed out by Audit. In para 2.14 of their 203rd Report (1983-84), the Hon'ble P.A.C. have expressed unhappiness over the situation in the following terms:- Para 2.14 Audit has pointed out an instance wherein a change in the previous year permitted by the Income-tax Officer to an assessee trust had resulted in loss of revenue of about Rs. 4,88,000 in that the wealth valued at Rs. 72,26,500 had escaped assessment to wealth-tax in respect of the assessment year 1974-75. Such instances have come to notice in the past also wherein consent given by the Income-tax Officer for the change of the accounting year had resulted in loss of revenue. Under Section 3(4) of the Income-tax Act, 1961 an assessee can change his previous year in respect of a business or profession with the consent of the Income-tax Officer, upon such conditions as the I.T.O. may think fit to impose. The Central Board of Direct Taxes have issued instructions for the guidance of the field officers from time to time. It has been laid down therein that Income-tax Officers should scrutinise each application for 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 revenue. The fact that such cases continue to occur despite repeated instructions issued by the Board indicates that the existing instructions do not offer much help to the Income-tax Officer. The Committee also observe that the instructions as worded at present are vague in that they do not clearly spell out the circumstances in which a change in accounting period may be refused by the Income-tax Officer. The Committee would like the Ministry to examine the feasibility of amending the existing instructions so as to clearly spell out their intention as also the precise steps which an Income-tax Officer may have to take to safeguard the interest of revenue in such cases. 3.1 In view of the observations made by the PAC the Board desires that ITO's should take proper care to safeguard the interests of revenue under the Wealth Tax Act also while allowing a change of previous year. In no case the wealth tax assessment should be allowed to escape. Since the Income Tax Officer may impose any conditions while allowing a change of previous year, he must consider the terms put forward by the assessee carefully and if he find that the terms are insufficient to safe-guard the interest of revenue, he has a good ground for refusing the change. Following guidelines are given with a view to protect the interests of revenue under the Wealth Tax Act while allowing a change of previous year:- 3.2 The Wealth tax is levied on net wealth of person on a particular date known as the valuation date. The valuation date as defined in Section 2(q) of the Wealth Tax Act is linked with the previous year as defined in Section 3 of the Income tax Act, 1961. The previous year is either the financial year preceding the assessment year or any other accounting year ending on any date falling within the financial year preceding the assessment year. W.T.O. may allow change of previous year only in certain type of situations. 3.3 In cases where the previous year ends on a date other than 31st March, the W.T.O. can allow a change of previous year to a date beyond a period of 12 months but before 31st March of the subsequent year. However, in cases where the previous year is followed by the assessee of the financial year, the Income-tax Officer cannot extend the previous year beyond 12 months as it would lead to omission of one wealth tax assessment. For example, in one case the assessee was having the financial year as the previous year for the purpose of income-tax. It changed its previous year to the year ending June 30th for the assessment year 1957-58. The valuation date was thus June 30th, 1957 for which the assessment year was 1958-59 and not 1957-58 and no assessment could thus be made under the Wealth Tax Act, 1957 on the assessee for the assessment year 1957-58. In such a case the ITO could have made the income tax assessment for 1957-58 in respect of the previous year of three months i.e 1-4-56 to 30th June, 1956. The corresponding valuation date would have been 30th June, 1956 and there could be no escapement of wealth tax for 1957-58. 3.4 The Income-tax officer has to beat in mind certain other facts also while allowing a change of previous year. In view of the Supreme Court's decision as reported in 69 ITR 864 the liability to pay wealth tax becomes crystallised on the valuation date not on the first date of the assessment year, though the tax is levied and becomes payable in the relevant assessment year. The ITO has also to compare the rates of tax for the original previous year and the changed previous year and the concessions in the from of deductions and exemptions relevant for these two years, while considering the interests of revenue. If any such case comes to the notice of the Commissioner of Income-tax, where there is a loss of revenue or an escapement of assessment, he may invoke the provisions of Section 263 of the Income Tax Act (or Sec.25(2)of the W.T. Act). 3.5 It may also be pointed out that there may be cases where no formal application is made requesting for a change in previous year but a change is noticed in the return of income or wealth filed. The ITO must treat such a return as an application for change of previous year and pass order explicitly. In case, the return is accepted without any objection, it will lead to implied consent for the change of previous year which may result in loss of revenue. 4. The guidelines as given above may be brought to the notice of officers working in your charge.