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TMI Blog1998 (9) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... return of income on June 22, 1976, for the calendar year 1977 and, inter alia, claimed a sum of Rs. 12,605 on account of bank guarantee commission. The Income-tax Officer disallowed the same on the ground that the guarantee being given for the purchase of the capital asset of the company, the expenditure constituted capital expenditure. While disallowing the same, the Income-tax Officer granted depreciation on it, treating it as an addition to the value of machinery. On appeal, the Commissioner of Income-tax (Appeals) allowed the expenditure following the decision of the Andhra Pradesh High Court in Addl. CIT v. Akkamba Textiles Ltd. [1979] 117 ITR 294. The Tribunal opined that the guarantee commission was required to be allowed as a proper revenue deduction. The question is now settled by the decisions of the Supreme Court in Addl. CIT v. Akkamamba Textiles Ltd. [1997] 227 ITR 464 and CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465. The Supreme Court has while confirming the decision of the High Court in CIT (Addl.) v. Akkamamba Textiles Ltd. [1997] 227 ITR 464, held that guarantee commission paid to a bank was revenue expenditure and hence was an allowable deduction in computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities of its engineering division. He found that the assessee had transferred profits to the said companies without there being any consideration or services rendered by them. Even in respect of Mehta Corporation Pvt. Ltd., the Income-tax Officer on enquiry found that no data was available in respect thereof and that similar profit was transferred by the assessee-company to that company also. The total sales to these three companies were to the tune of Rs. 1,35,88,290 and the Income-tax Officer taking the average gross profit at 4 per cent., came to the conclusion that a sum of Rs. 5,43,500 was transferred by the assessee-company to these three associated companies in which the directors of the assessee-company were interested, without any services being rendered by them to the assessee, and added the said amount in the total income of the assessee. This assessment order was made on September 11, 1979, under section 143(3), read with section 144B of the said Act. A direction was received under section 144B from the Inspecting Assistant Commissioner against the second draft order, which was sent to the Inspecting Assistant Commissioner on May 24, 1979, after the Inspecting Assist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the Explanation to section 144A(1), be said to be in any way prejudicial to the assessee. As regards the addition of the sum of Rs. 5,43,500 on account of diversion of profit on the transactions with the aforesaid three companies, the Inspecting Assistant Commissioner took note of the fact that the assessee was given full opportunity to explain all the facts and circumstances of the transactions in question and found that it was established that the sales were actually effected directly by the assessee-company to the parties and these companies had done nothing in respect of such transactions and that the Income-tax Officer was justified in holding that a part of the income of the assessee-company was diverted to these companies. As noted above, pursuant to the directions issued by the Inspecting Assistant Commissioner under section 144B(4) on the second draft assessment order forwarded to the Inspecting Assistant Commissioner on April 25, 1979, the Income-tax Officer made the final assessment order on September 11, 1979. In the appeal filed by the assessee before the Commissioner of Income-tax (Appeals), the first appellate authority accepted the assessee's contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act, were not taken away. It was submitted that the directions which were issued by the Inspecting Assistant Commissioner under section 144A(1) of the Act were only indicative of the lines of investigation, which was in fact pursued by the Income-tax Officer by making enquiries in respect of the transactions with the said three companies, and before the Income-tax Officer, the assessee had full opportunity of being heard in the matter. It was submitted that it was not incumbent upon the Inspecting Assistant Commissioner to hear the assessee before issuing directions of this nature under the proviso to section 144A(1) of the Act, whereby the Income-tax Officer was only asked to make enquiries in respect of the sales carried out by the engineering division of the assessee to the three private limited companies. Reliance was placed by learned counsel on the decision of the Kerala High Court in CIT v. N. Krishnan [1988] 172 ITR 604; the Karnataka High Court in CIT v. M. S. P. Export Pvt. Ltd. [1992] 196 ITR 762, the Calcutta High Court in Arrah Sasaram Light Railway Co. Ltd. v. CIT [1993] 204 ITR 807 and Shankar Lahiri v. CIT [1995] 78 Taxman 364 (Cal), in support of his contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve and follow such instructions as may be issued to him for his guidance by the Director of Inspection or by the Commissioner or by the Inspecting Assist ant Commissioner within whose jurisdiction he performs his functions. The Inspecting Assistant Commissioner was required to perform functions in respect of such areas or of such persons or classes of persons or of such incomes or classes of income or of such cases or classes of cases as the Commissioner directed under section 123(1) of the said Act. Concurrent jurisdiction as that of the Income-tax Officer could be conferred on the Inspecting Assistant Commissioner by the Commissioner under section 125A(1) of the Act. The Inspecting Assistant Commissioner was empowered by section 125A(3) to issue instructions to the Income-tax Officer within whose jurisdiction he performs his functions in relation to any particular proceeding or the initiation of any proceeding under the Act for his guidance. As per the Explanation to sub-section (3) of section 125A, no instruction is to the lines on which an investigation connected with the assessment should be made shall be deemed to be an instruction prejudicial to the assessee so as to require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eptance of the variation, the Income-tax Officer shall complete the assessment on the basis of the draft order. (4) If any objections are received, the Income-tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the Income-tax Officer to enable him to complete the assessment : Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the assessee to be heard. (5) Every direction issued by the Inspecting Assistant Commissioner under sub-section (4) shall be binding on the Income-tax Officer. (6) For the purposes of sub-section (1), the Board may, having regard to the proper and efficient management of the work of assessment, by order, fix, from time to time, such amount as it deems fit: Provided that different amounts may be fixed for diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Income-tax Officer, even in such cases. Even after he makes a reference and the draft order and the objections are before the Inspecting Assistant Commissioner, the assessment is yet to be completed by the Income-tax Officer, who awaits the directions of the Inspecting Assistant Commissioner under section 144B(4) of the Act. Therefore, while considering the matter under section 144B of the Act, if the Inspecting Assistant Commissioner finds it necessary to issue directions regarding matters not covered by the objections of the assessee and therefore not by the provisions of section 144B(4) of the Act, then he can still issue such directions under section 144A(1) of the Act, which, if related to the lines on which investigation should be made, will be deemed to be not prejudicial to the assessee and on following such directions, if the Income-tax Officer is in a position to complete the assessment, he may do so. However, if again a situation arises after implementing the directions issued under section 144A(1) of the Act regarding matters not covered by the objections against the draft order previously forwarded, which require a draft order to be made in view of the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant Commissioner under section 144B(4) and the assessee cannot revise his returns, the thing that remains for the Income-tax Officer to do is to pass a final order in accordance with the directions of the Inspecting Assistant Commissioner, as held by the Supreme Court in Panchamahal Steel Ltd. v. U. A. Joshi, ITO [1997] 225 ITR 458. In that case the Supreme Court construing the provisions of section 139(5) of the Act, held that if the assessee's contention that even after making a reference under section 144B, the assessee is entitled to file a revised return is accepted, then it may mean re-doing the entire exercise over again and the reference already made may be rendered unnecessary, which situation is not provided for in the Act. It is obvious that when the Income-tax Officer prepares a draft order, he tentatively, i.e., subject to the further procedure required to be followed and the directions of the Inspecting Assistant Commissioner, does work out the total income and the tax payable thereon and once that is known by the assessee on receipt of the draft order, to allow the assessee to revise the return which can be done only if he discovers any omission or wrong statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision is not an assessment at all. An assessment is not a piece of paper, it is an official act or operation. It is the Income-tax Officer's ascertainment on consideration of all the relevant circumstances including sometimes his own opinion, of the amount of tax chargeable to a given taxpayer. When he has completed his ascertainment of the amount and determination of tax, he sends the notice of demand. The act of assessment is complete only when he makes the final order. Therefore, the powers under section 144A(1) could be exercised till such final order is made or a draft order is prepared by making a tentative assessment by following the directions that may have been given by the Inspecting Assistant Commissioner. While it is not necessary for the Income-tax Officer to seek guidance under section 144A(1) of the Act and he can complete the assessment in matters which are within his pecuniary limits set by the Board under section 144B(6) of the Act, he has to defer completion of the assessment until he receives directions in the matters, which exceed those pecuniary limits where objections are filed against the draft order and forwarded along with it to the Inspecting Assistant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering division of the assessee to the three private limited companies. It is clear from the nature of the directions that these were intended only to provide lines on which further investigation connected with the assessment was to be made by the Income-tax Officer. The Explanation to section 144A(1) clearly lays down that no direction as to the lines on which the investigation connected with the assessment should be made, shall be deemed to be a direction prejudicial to the assessee. The expression "direction as to the lines on which an investigation connected with the assessment should be made" is of wide amplitude and there is no reason to confine it to mere investigations on the points which are already investigated. Such an interpretation as was sought to be suggested on behalf of the assessee, would render the Explanation ineffective in respect of a larger number of cases where investigation which ought to have been made, has not been made, rendering nugatory the very power which was conferred on the Inspecting Assistant Commissioner under section 144A(1) of the Act. The reason underlying the Explanation to section 144A(1) appears to be that for starting investigations in exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is open before him for directions. The Kerala High Court in CIT v. N. Krishnan [1988] 172 ITR 604, has held in the context of the provisions of sections 144A, 144B, 153 and Explanation (1)(iv) to section 153 of the Act, that the time for completing the assessment having been statutorily extended, by reason of the reference, to the additional period prescribed under Explanation 1(iv) to section 153, the recomputation of the amounts by the Inspecting Assistant Commissioner, whether or not with the concurrence of the assessee, on items not arising from the reference, was a perfectly valid exercise of power in terms of section 144A(1). The Karnataka High Court in CIT v. M. S. P. Exports Pvt. Ltd. [1992] 196 ITR 762, while considering the provisions of sections 144A and 144B of the Act, has held that there can be no doubt that an assessment is not complete when only a proceeding under section 144B is pending. In fact, under section 144B, only a draft order is prepared. The assessment is to be completed only after the Inspecting Assistant Commissioner issues appropriate directions under section 144B(4), after which the Income-tax Officer will have to complete the assessment. Simil ..... X X X X Extracts X X X X X X X X Extracts X X X X
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