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TMI Blog2001 (4) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... such provision. It further be held that addition made in terms of such provision is mistake apparent from records and the same should have been rectified by the Assessing Officer. It further be held that not accepting the contention of the appellant in this respect for carrying the required rectification in terms of provisions of section 154 is contrary to the provisions of the law. The additions so made be deleted. Just and proper relief be granted to the appellant in this respect." 2. The assessee is a closely-held Limited Company engaged in the business of manufacturing of dispersants, biocides and organophosphonate, that is to say, water treatment chemicals. With a view to diversifying its activity, it had entered into an Agreement in October, 1989 with AEGAIK, a German Company (AIK for short) for supply of technical know-how for manufacture of Fire Retardant Chemicals consisting of coating materials (for coating electrical wires etc.) and scaling materials (scaling openings through which wires pass). These chemicals are designed to be fire resistant and were being manufactured by AIK Germany. These chemicals are having particular interest for fire industry. Technical know-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The assessee had also enclosed Tax Audit Report and in a Note given the Tax Auditors had stated as under: "1. The company received sum of Rs. 4,53,86,124 being the amount awarded by way of settlement of disputes between the company and AEGAIK Germany. The amount so received is treated as capital receipt by the company and has not been offered as taxable income for the purpose of the Income-tax Act and is not considered while computing the income for the assessment year 1998-99." These were the only two materials filed with the return of income in regard to the sum of Rs. 4,53,86,124. 4. The returns filed by the assessee-company were processed by the Assessing Officer and an Intimation was issued computing the adjusted total income at Rs. 11,88,79,474 (copy of the Intimation given on pages 1 to 3 of the paper book). In the adjustment explanatory sheet, it was shown that two additions were made; one of Rs. 4,53,86,124 and the other was of Rs. 10 crores. In regard to the first item, the reasons given for the addition are that the amount received by way of settlement of disputes between the assessee-company and AEGAIK being revenue receipt. The assessee had not submitted any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs also had not been produced for verification before the Auditors and, therefore, no clear findings could be given by them. In view of this and also for the reasons recorded in the adjustment explanatory sheet, the contention of the assessee was not accepted and the receipt was held to be receipt of revenue nature. Incidentally, the Assessing Officer also observed that the assessee-company had claimed expenses of Rs. 36,10,250 on arbitration expenses in assessment year 1997-98 as was clear from Schedule 15 to the profit and loss account filed with the return of income for the assessment year 1998-99. According to the Assessing Officer, the receipt was clearly of revenue nature and not capital nature and the contention of the assessee was rejected. 9. Dealing with his own notice under section 154, the Assessing Officer observed that the provision made by the assessee on account of retirement benefit and leave encashment of Rs. 4,21,262 was not allowable. Though it was stated before him by the assessee that these amounts were actually paid subsequently, in June/July, 1998, the Assessing Officer held that the amount was outstanding as on 31-3-1998 and since the liability of leave e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the assessee in lieu of profits and not because the assessee's profit-earning apparatus was affected. According to the CIT(A), had the assessee received damages for injury affected to the profit-earning apparatus, the assessee might have had some case to treat the receipts as capital receipt. However, it was clear from the facts of the case that the amount had been received by the assessee in lieu of profits. The CIT(A) accordingly held that the amount of Rs. 4,53,86,124 was clearly in the nature of revenue receipt. He further observed that perusal of the Arbitration Award clearly mentioned that the amount had been received by the assessee in lieu of profit or on account of loss of profit. The amount was, therefore, clearly in the nature of revenue receipt. According to the learned CIT(A), all the facts being available on record, the Assessing Officer need not have made any investigation to find out the nature of the receipt as it is a basic principle of law that the amount received in lieu of profit is nothing but a revenue receipt. The CIT(A), therefore, agreed with the Assessing Officer that the addition of Rs. 4,53,86,124 was in the nature of prima facie adjustment. He a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as a result of subsequent interpretation of law by the Supreme Court would constitute a mistake apparent from the record' and rectificatory action under section 35/154 of the Income-tax Act, 1922/1961 would be in order. It has, therefore, been decided that where an assessee moves an application under section 154 pointing out that in the fight of a later decision of the Supreme Court pronouncing the correct legal position, a mistake has occurred in any of the completed assessments in his case, the application shall be acted upon, provided the same has been filed within time and is otherwise in order. Where any such applications have already been rejected and the assessee files fresh applications within the statutory time-limit, the same may also be treated on par with the applications which i-nay either be pending or received after the issue of this circular." In view of these clear directions of the CBDT on the effect of the Supreme Court decision, the direction of the Assessing Officer that an amount of Rs. 4,21,262 should have been added as prima facie adjustment in issuing Intimation under section 143(1)(a) is patently wrong and requires to be quashed. If the prima facie adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and not an application under section 154 which had a limited scope. 19. We have considered the rival submissions and perused the facts on record. In the first place, the scope of prima facie adjustment is restricted only to disallowance of 'a deduction, allowance or relief claimed in return'. The Assessing Officer in issuing Intimation under section 143(1)(a) has no power in making an income adjustment. Reliance is placed in this behalf on the decision of the Hon'ble Bombay High Court in the case of Admas Gem Industries Ltd. In this case, the Assessing Officer had issued an Intimation under section 143(1)(a) seeking to add an amount received by way of compensation from the vendor for delay in completing the sale of office premises. It was held by the Hon'ble Bombay High Court that the said adjustment did not fall within the parameters of the proviso, clause (iii) to section 143(1)(a). The Intimation and consequent claim for Additional Tax were held to be invalid, To the similar effect are the decisions of the Gauhati High Court in the case of Namdang Tea Co. (India) Ltd. and Makum Tea Co. (India) Ltd. and relied upon by the learned counsel for the assessee. Both these decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee before the Assessing Officer and before the CIT(A). In that context, the Bombay High Court held that "permissible adjustments are, interalia, only of those claims which are, on the basis of information available in the return, prima facie inadmissible. The assessing authority is not permitted under the guise of making adjustment to adjudicate upon any debatable issue". In the present case, it has been pointed out that the material before the Company Auditors was insufficient to come to any definite conclusion whether the receipt of Rs. 4,53,86,123 was a revenue receipt or capital receipt. The Note of the Tax Auditor was also equally insufficient. The question whether a compensation received for breach of contract is a capital or revenue receipt is of highly debatable nature. In coming to the conclusion whether in the circumstances of a particular case the compensation is capital or revenue receipt, many questions have to be asked and answered; what was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoints ? If it was a business of taking agencies how many agencies it had, what was their nature and variety ? How w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in CIT v. Elys Plastics (P.) Ltd. [1991] 188 ITR 11 is relevant. The question before the Bombay High Court was whether central subsidy was to be reduced from the actual cost of the asset. It was held by the Bombay High Court that only because quantum of subsidy was calculated on the basis of fixed capital investment of the company in land, plant and machinery by itself could not lead to the conclusion that the said subsidy was given to meet the cost of land, plant and machinery. This was only the manner of calculations. Thus, the fact that arbitrators based their compensation on loss of profits was not conclusive of the matter and the real purpose for which compensation was granted was required to be gone into. Such an issue which was of very complex nature could not have been subject-matter of prima facie adjustment. In our opinion, the CIT(A) grossly erred firstly in going into the documents which were not part of the return and then coming to the conclusion that the receipt was clearly revenue in nature and could be subject-matter of prima facie adjustment. 23. In fact the real issue before the CIT(A) was very limited one, namely, whether a particular item could be sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 143(1)(a) itself. This is supported by the binding decision of the Bombay High Court in the case of Adamas Gem Industries Ltd. This constitutes an apparent error. The second apparent error was that it was the Assessing Officer who was making a prima facie adjustment on an issue which was debatable. Once the D.R. accepted that the issue was debatable, the fact that it was made subject-matter of prima facie adjustment was clearly an error apparent from record and the Assessing Officer ought to have rectified the same by deleting in 154 proceedings. 25. It is true that the assessee had a remedy of appeal against the Intimation under section 143(1)(a). The assessee did file an appeal against the Intimation under section 143(1)(a) on 20-6-1999. Filing of the appeal did not preclude the assessee from seeking rectification of an apparent error where such a remedy was available in law. In fact, the CIT(A) heard both the appeals together, but chose to pass order only in appeal against the order under section 154. In this appeal also, the assessee was entitled to agitate the entire issue regarding the propriety and correctness of the prima facie adjustment. In this behalf, reference ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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