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TMI Blog2000 (6) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... equal to the amount of deduction claimed under section 80HHC was to be debited to the profit and loss account of the previous year in respect of which the deduction under section 80HHC was to be allowed and the amount was to be credited to a reserve account to be utilised for the purpose of the business of the eligible assessee. For the assessment year 1986-87 the appellant filed a return of income on 30th June, 1986 showing a net loss of Rs. 82,329, which was arrived at after setting off the brought forward losses of earlier years amounting to Rs. 4,66,929. In the computation of income furnished along with the return of income, a note was appended, which read as follows: 'Note: Deduction under sections 80C, 80L and 80HHC are not claimed in the absence of taxable income.' The original assessment was completed by order dated 10-2-1987, in which the set off for brought forward losses of the earlier years was allowed to the extent of Rs. 4,25,006 and the gross total income was determined at Rs. 8,660 and after deductions under sections 80C and 80L, the assessment was closed as 'No Demand'. 2. Subsequently, vide a letter dated 20-11-1992 the Assessing Officer proposed to recti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3. income from other sources Rs. 6,412 had been omitted to be included in the total income, while revising the assessment on 8-2-1993. It is proposed to rectify the above mistake. Your objections if any to the above proposal may be furnished to this office on or before 26-11-1993. A notice under section 154 is enclosed.' The appellant filed objections to the above letter, but the Assessing Officer rejected the contention of the appellant and in formed vide his letter dated 1-12-1993 that the deductions under section 80HHC cannot be granted. The said letter read as follows: 'With reference to the above, I have to state as follows: (a) 80C deduction previous year is clearly shown in computation of returns filed as YE 31-3-1986. (b) Section 80HHC deduction : I do not accept that the necessary reserve can be created by an invalid return. The condition is that the reserve be utilised for purpose of business. There is no method of verifying this when the reserve is purportedly 'created' that too by an invalid return after more than seven years from the end of the previous year. In the circumstances I regret my inability to amend the order already passed.' 4. Before the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of the I.T. Act have been suitably amended with retrospective effect from 1-4-1962 by the Finance Act, 1990 by providing that the condition of the creation of reserve in the relevant year of account is not mandatory. As a similar amendment is not made in the context of creation of reserve under the provisions of section 80HHC, he was of the view that the question as to the year in which the reserve has to be created is not free from doubt and accordingly he rejected the claim of the assessee with the following remarks: "Having regard to these facts it cannot be said that the question regarding the year in which the reserve for the purpose of sub-section (1) of section 80HHC has to be created is a matter free from doubt. Arguments can be raised either way. In such a case section 154 will have no application since the matter is a debatable one. Hence the appellant cannot invoke section 154 and require the Assessing Officer to allow deduction under section 80HHC. Accordingly I hold that the Assessing Officer was justified in rejecting the appellant's claim.' 5. Before us, the learned counsel for the assessee pleaded that the assessee could not have created the reserve at the ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was entitled to development rebate at a rate higher than that already allowed but, as the assessee had not created the necessary reserve, it could not be allowed. The Appellate Tribunal held that as rectification proceedings are part of the assessment proceedings and that finding had not been challenged the assessee was entitled to an opportunity to create a reserve till the end of the rectification proceedings. On a reference: Held, that the Tribunal was right in directing the Income-tax Officer to allow an opportunity to the assessee to meet the deficiency in the reserve.' The learned counsel for the assessee further mentioned that the above decision of the Allahabad High Court is based upon its earlier decision in the case of Modi Spg. Wvg. Mills Co. Ltd., which, as already mentioned, had been affirmed by the Supreme Court subsequently. 6. The learned departmental representative, on the other hand, pleaded that there was a positive income in the profit and loss account of the assessee for the year ended 30-9-1985, i.e. the year of account relevant for the assessment year 1986-87 and when there is a positive income in the profit and loss account, there was no j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause of the absence of taxable income. If the Assessing Officer proposes to make any additions or reduce losses, which would turn the total income into a positive figure, he, to our mind, has necessarily to intimate such adjustments proposed to be made to the assessee and also give an opportunity of creating the reserve under the provisions of section 80HHC. Actually the Assessing Officer in his letter dated 8-2-1993 has intimated that the assessment would be modified if the assessee furnishes the particulars. Instead of giving an opportunity to create a reserve before passing the relevant rectification/modification order, the Assessing Officer chose first to pass the rectification/modification order and at the same time agreed to modify the assessment for the year 1986-87 if the assessee furnished the requisite particulars to substantiate the claim, under section 80HHC and other relevant sections. It has been argued before us by the Id. departmental representative that the said promissory remark contained in the order dated 8-2-1993 is only a conditional promise and it in no way curtails the freedom of the Assessing Officer to reject the claim for deduction under section 80HHC on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Apex Court in the case of Shri Shubhlaxmi Mills Ltd. is not applicable, as that decision is an authority for the proposition that the reserve has to be created only in the relevant previous year and the, issue involved in the present appeal is not the relevant year in which the reserve has to be created, but whether the reserve could be created subsequent to the filing of the return and even subsequent to the making of the assessment. So, we are of the view that the reliance placed by the CIT (Appeals) on the said decision is misplaced. The Hon'ble Allahabad High Court has clearly held in the case of Saran Engg. Co. Ltd. that the assessee was entitled to an opportunity to create a reserve till the end of the rectification proceedings. The ratio of the decision of the Bombay Bench of the Tribunal in the case of R.R. Hosiery (P.) Ltd., also supports the view that the assessee could be allowed to create a reserve even subsequent to the assessment. We may also mention that no argument has been advanced before us as to the time limit for effecting any rectification order in the present case. In the circumstances, we are of the view that the assessee was entitled to create ..... X X X X Extracts X X X X X X X X Extracts X X X X
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