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TMI Blog1982 (7) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... f its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate, or rates specified in the Third Schedule to the Surtax Act. Under cl. (5) of s. 2, the expression " chargeable profits " means the total income of an assessee computed tinder the I.T. Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule to the Surtax Act. Under cl. (8) of the said s. 2, as it stood at the relevant time, the expression " statutory deduction " meant an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule to the Surtax Act, or an amount of two hundred thousand rupees, whichever was greater. Under s. 5(1), every company whose chargeable profits assessable tinder the Surtax Act exceeded during the previous year the amount of statutory deduction is bound to furnish a return of the chargeable profits of the company during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed, before the 30th day of Septe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and the amount of the surtax payable on the basis of such assessment. " " 7. Provisional assessment.-(1) The Income-tax Officer, before proceeding to make an assessment under section 6 (in this section referred to as the regular assessment) may, at any time after the expiry of the period allowed under sub-section (1) or sub-section (2) of section 5 for the furnishing of the return and whether the return has or has not been furnished, proceed to make in a summary manner a provisional assessment of the chargeable profits and the amount of the surtax payable thereon. (2) Before making such provisional assessment, the Income-tax Officer shall give notice in the prescribed form to the person on whom the provisional assessment is to be made of his intention to do so, and shall with the notice forward a statement of the amount of the proposed assessment, and the said person shall be entitled to deliver to the Income-tax Officer at any time within fourteen days of the service of the said notice a statement of his objections, if any, to the amount of the proposed assessment. (3) On expiry of the said fourteen days from the date of service of the notice referred to in sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1975, were received by Siemens on January 20, 1975. The present petition was filed on February 24, 1975, seeking to set aside the said order of provisional assessment and the said notice of demand. The petition was admitted and an interim stay of the provisional order, of assessment and its recovery was granted by this court, and the respondents were restrained from taking any steps in pursuance of either the impugned order of provisional assessment, or the said, impugned notice. Nevertheless, Siemens paid a sum of Rs. 6,74,912 by way of surtax payable according to their return out of the sum of Rs. 12,89,844 demanded from them. The notice of the proposed provisional assessment dated December 20,1974, and the statement annexed thereto do not show why the ITO wanted to reduce the capital computation made by Siemens in their re turn, but it appears that by comparing the statement annexed to the said notice and the return filed by them, Siemens were able to understand what was proposed to be done, and had filed their objections accordingly. In order to understand what was in fact done by the ITO and to test the validity of his action it is first necessary to see the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of (i) its paid-up share capital; (ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act,1961 (43 of 1961); (iii)its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961); ...... Explanation.-For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'RESERVES AND SURPLUS' or of any item under the heading 'CURRENT LIABILITIES AND PROVISIONS' in the column relating to 'LIABILITIES' in the 'FORM OF BALANCE-SHEET' given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exclude five items from the Computation of capital, namely, (a) doubtful debts reserve, (b) provision for doubtful debts, (c) excess provision for taxation, and (d) deduction of sum of Rs. 43,20,000 from the balance of the general reserve, which sum had been recommended by the board of directors of Siemens to be paid as dividend if approved by the shareholders at the annual general meeting of Siemens to be held on March 23, 1973, and which dividend had in fact been approved and paid during the following year, and (e) deduction of sum of Rs. 1,26,29,182 being the amount of deductions to be made under Chap. VI-A of the I.T. Act, 1961, in computing the total income to which, according to Siemens, they were entitled under r. 4 of the Second Schedule to the Surtax Act. The show-cause notice does not set out any reasons why these amounts were not proposed to be taken into account by the ITO in computing the capital base. From their return and the statement annexed to the show-cause notice Siemens could make out what was proposed to be done. In their said letter dated December 27, 1974, they, therefore, set out their objections thereto. These objections were not, and from the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is petition several points were argued on behalf of the petitioners. They may be summarized thus : (1) The impugned order of provisional assessment has been made without any application of mind, because objections were submitted by Siemens to the ITO on December 27, 1974, which was a Friday, and the order of provisional assessment was made on December 30, 1974, which was a Monday. (2) The impugned order of provisional assessment is not a speaking order. (3) An order of provisional assessment cannot be made unless and until the concerned assessee's total income under the I.T. Act has been ascertained and assessed inasmuch as such ascertained total income is the starting point for arriving at the chargeable profits. (4) In a provisional assessment under s. 7 of the Surtax Act, the ITO is bound to make his assessment only on the basis of the return submitted by the assessee, and it is only in cases in which a return is not filed that the provisions of s. 7(2) apply. (5) In the alternative, assuming for the sake of argument that provisional assessment can even be made in a case where a return is filed, it is inherent in the nature of a provisional assessment that it should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... starting point for arriving at the chargeable profits. Even on first principles, the argument would appear to be fallacious. The very object of making a provisional assessment is the expeditious collection of tax. Assessment to income-tax may and does take time. Section 153 of the I.T. Act prescribes the time-limit for completion of assessments and reassessments, and a glance at that section would show the period which is given for making an assessment under the I.T. Act. If, therefore, the ITO were to wait for the assessment of income under the I.T. Act, the expeditious collection of surtax would necessarily be postponed and the purpose for which the statute has provided for making a provisional assessment would thus be frustrated. Section 7 does not contain any such restriction on the power of the ITO in making a provisional assessment. On the contrary, it confers upon him a power to do so at any time after the expiry of the Period for the furnishing of the return. In this connection, Mr. Dastur, learned counsel for the petitioners, relied upon the opening words of the First Schedule to the Surtax Act, namely, " In computing the chargeable profits of a previous year, the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and on the relevant statutory provisions. The next point taken on behalf of the petitioners is that a provisional assessment under s. 7 of the Surtax Act must only be made on the basis of the return where one has been filed, and it is only in cases in which return is not filed that a notice, under s. 7(2), of the intention of the ITO to make a provisional assessment, is to be given. This contention equally does not appear to me to be correct. Under sub-s. (1) of s. 7, the ITO has the power to make a provisional assessment at any time after the expiry of the period for the furnishing of the return and "whether the return has or has not been furnished ". Under sub-s. (2) of s. 7, " Before making such provisional assessment " the ITO is required to give a notice of his intention to make the provisional assessment. The expression, " Before making such provisional assessment " would mean before making a provisional assessment, whether the return has been furnished or not. The issuance of a notice tinder sub-s. (2) of s. 7 before making a provisional assessment is a mandatory requirement and applies both to case where a return has been filed as also to a case where a return has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applying for a stay of the whole or part of the amount demanded under an order of provisional assessment, even though such provisional assessment may be wholly arbitrary and capricious. In Mr. Dastur's submission, these features of a provisional assessment clearly show that it was never the intention of Parliament that an ITO should be left free to make any provisional assessment he likes, however arbitrary it may be, but the intention was that the scope of a provisional assessment should be confined only to the return filed by the assessee, or to restrict him in making a provisional assessment from deciding by himself without an opportunity of hearing being given to the assessee complicated questions of law and fact in any manner he liked, irrespective of even what the courts or the Income-tax Appellate Tribunal might have held in various cases, as according to Mr. Dastur, the ITO has done in the present case. There is no decided case on the scope of a provisional assessment under s. 7 of the Surtax Act, or at least none which the industry of learned counsel have brought to my notice. In support of his submission Mr. Dastur relied upon s. 141 of the I.T. Act, which was del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject it, but where the position was not so clear and the determination of the claim would involve inquiry into questions of fact, it was not open to the ITO to proceed to adjudicate upon that claim. The High Court further held that similarly an ITO in making a provisional assessment bad no jurisdiction to enquire into a mixed question of fact and In Jaipur Udyog Ltd. v. CIT [1969] 71 ITR 799, the Supreme Court held that s. 141 had been enacted with the object of expediting collection of tax on the basis of the return made by the assessee. It further pointed out that in the making of provisional assessment the assessee had no right to be heard or to explain or elucidate and had no right of appeal against the computation of the levy of tax. The Supreme Court further stated at p. 804 "In our judgment, if it be granted that the Income-tax Officer has jurisdiction to hold an enquiry into disputed matters, the expression ' provisional assessment ' may lose till significance : the Income-tax Officer may under a summary assessment without giving an opportunity to the assessee to explain his claim negative it and the assessee has no redress under the Act (that is, the Income-tax Act, 1961) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lification is conspicuous by its absence in s. 7. Secondly, s. 141 does not require any notice to be given to an assessee of the ITO's intention to make a provisional assessment and calling upon him to state his objections, if any, to the amount of the proposed assessment. The similarities between the two sections, however, are that under both the sections the provisional assessment is to be made in a summary manner and there is no inquiry or hearing and no right of appeal provided against the order of provisional assessment. On behalf of the Revenue emphasis was placed on the two points of difference in the language of these sections which I have mentioned above, and it was argued that the very fact that s. 141 did not require a provision, assessment to be made on the basis of the return and the accounts and documents accompanying it showed that it was open to the ITO not to accept the return as correct but to reject certain claims made by the assessee. It was further said that the provisional assessment under the Surtax Act could not be said to be wholly ex parte inasmuch as an opportunity was to be given to the assessee to state his objections to the proposed assessment. The que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estions arise in a petition under s. 155 of the Companies Act, 1956, the summary remedy for rectification of the register of members provided for by the said section was not a proper one and ought not to be allowed and the petitioner should be referred to a regular suit for obtaining the relief of rectification. The starting point for arriving at the chargeable profits of a company is the total income of the company and the form of return of chargeable profits is to contain the computation thereof. Now, were the argument of the Department correct, it would follow that the ITO would have the power to determine, while making a provisional assessment, what is the total income of the assessee computed in accordance with the provisions of the I.T. Act. He can reject items claimed as exemptions or deductions and arrive at his own determination of income and then proceed to determine the chargeable profits. Such a construction would invest the ITO with an arbitrary authority with respect to facts and the law applicable thereto. Mr. Joshi conceded, and in my opinion rightly, that it was not open to the ITO while making a provisional assessment to dispute the total income returned by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin whose jurisdiction the ITO is, would tantamount to committing contempt of that court. In East India Commercial Co. Ltd. v. Collector of Customs, Calcutta, AIR 1962 SC 1893, 1905, the Supreme Court held that an administrative authority or Tribunal cannot ignore the law declared by the highest court in the State. The Supreme Court pointed out that taking into consideration the provisions of arts. 215, 226 and 227 of the Constitution it would be anomalous to suggest that a tribunal over which the High Court had superintendence can ignore the law declared by that court and start proceedings in direct violation of it, the result being that if a tribunal can do so, all the subordinate courts can equally do so on the ground that there is no specific provision, just like there is in the case of the Supreme Court, making the law declared by the High Court binding on subordinate courts. The Supreme Court further held that it is implicit in the power of supervision conferred on a superior tribunal that all the tribunals subject to its supervision should conform to the law laid down by it, for such obedience would be conducive to their smooth working, while otherwise there would be confus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the Department that the writ petition filed by the assessee was not maintainable as the assessee had an alternative remedy because they could file an appeal against any order passed in the reassessment proceedings. Overruling this preliminary objection, the court held that the Commissioner had already in another-case taken a view against the petitioners' case, which view had been set aside by the Tribunal in an appeal filed in that case and, therefore, the claim of the Department that there had been an under-assessment was patently contrary to the provisions of law and the preliminary objection to the maintainability of the petitions must be overruled. In defining the limits of the power of the ITO to make a provisional assessment it is paramount to bear in mind that the object of such an assessment is to accelerate the collection of revenue and not to keep it pending until a regular assessment is made. This, however, does not mean that the revenue which has to be collected thereby should be contrary to law or collected on a basis which cannot stand in a regular assessment. A provisional assessment must be made in accordance with law. It cannot be arbitrary, because that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim in respect thereof would be directly contrary to the provisions of Expln. 1 to r. 2 of the Second Schedule to the Surtax Act. Bearing in mind the conclusions I have reached with respect to the extent of the power of the ITO in making a provisional assessment under s. 7 of the Surtax Act, I will now examine the impugned order of provisional assessment in the instant case. The first two items excluded by the ITO from the computation of capital were doubtful debts reserve and provision for doubtful debts. The ground given by the ITO in the impugned order for excluding these two items is that these amounts were set aside to meet anticipated losses and, therefore, could not be classified as reserves. It is the case of Siemens that these amounts stood in their books for several years and were not meant to be utilized for writing off bad or doubtful debts and that such debts were invariably debited to the profit and loss account and not to the reserve account and, therefore, these accounts were not maintained to meet any specific liability for bad or doubtful debts. This factual position is not disputed before me. In CIT v. Jupiter General Insurance Co. [1975] 101 ITR 370 (Bom), d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference or not was itself a debatable and complicated question of law which the ITO in making the provisional assessment was not entitled to decide. Further, in any event on the date of the impugned order, the Income-tax Appellate Tribunal at Bombay had taken a view favourable to Siemens in the two cases under the Surtax Act itself which have been mentioned above. That the view taken by the ITO was wrong in law is also shown by a recent judgment of Division Bench of this High Court in Parke Davis (India) Ltd. v. CIT [1981] 130 ITR 813, in which on similar facts the court decided in favour of the assessees in references made both under the Super Profits Tax Act and the Surtax Act. It is unnecessary to burden this judgment with other decisions to the same effect which were cited at the Bar and which have taken the same view. The next item which was excluded by the ITO was excess provision for taxation. Under r. 2 of the First Schedule to the Surtax Act, the balance of the total income arrived at after making the exclusions mentioned in r. 1 are to be reduced, inter alia, by the amount of income-tax payable by the company in respect of its total income under the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal at Bombay had taken a view favourable to the assessees in several decisions, namely, S.T.A. No. 212 (Bom) of 1973-74-ITO v. Inarco Ltd., S.T.A. No. 289 (Bom)/70-71-ITO v. Johnson & Johnson Ltd., S.T.A. No. 137 (Bom) of 1972-ITO v. Colour-Chem Ltd. and S.T.A. No. 24 (Bom) of 1973-74-ITO v. Atlas Copco (India) Ltd. The ITO was, therefore, not entitled to take a view contrary to that taken by the Income-tax Appellate Tribunal at Bombay. It may, however, be mentioned that in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), referred to earlier, the Supreme Court has taken a view against the contention of Siemens and held that such an item would be a provision, but this decision of the Supreme Court came only on September 25, 1981, that is, about six years and nine months after the date of the impugned order of provisional assessment. The last item which remains to be considered is with respect to the sum I of Rs. 1,26,29,182, being the total amount of deductions claimed under Chap. VI-A of the I.T. Act in computing the total income. The ITO has rejected the contention of Siemens with respect to this sum on the ground that the amount of such deductions did not for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de under Chap. Vl-A are different from the types of income which are not includible in the total income under s. 10. While s. 10 refers to the types of income which are not to be included in the gross total income, Chap. VI-A refers to the amounts which can be claimed as deductions and thus are, to be deducted from the gross total income in order to arrive at the taxable income. Rule 5 of the Surtax Rules provides that the return of chargeable profits is to be in Form No. annexed to the said Rules. Part 11 of the form of return provides for computation of chargeable profits. In col. 1 is to be set out the total income computed in accordance with the provisions of the I.T. Act under various heads of income. The material provisions of Note 2 to that part is as follows: " Note 2 (See item I of Part II). Against each of the entries (i) to (v), there should be shown the income as computed under the respective heads of income under the Income-tax Act, 1961, after taking into account all deductions permissible under that Act. In Pt. III is to be set out the computation of statutory deduction. Column 13(a) of that Part is as follows : I " 13. (a) Amount of income, profits or gains, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eded with respect to all the items which are the subject-matter of this petition except one relating to the reduction of the general reserve by a sum of Rs. 43,20,000, being the amount of dividend declared and paid from such general reserve. At the instance of Siemens the Tribunal has made a reference on this point to this High Court, being Income-tax Reference No. 228 of 1981. At the instance of the Department also, a reference has been made in respect of the, items of doubtful debts reserve and provision for doubtful debts, that being Reference No. 456 of 1981. The Department's application to refer to this High Court the question relating to the amount of deductions under Chap. VI-A of the I.T. Act was disallowed by the Tribunal. Against this order the Department has filed an application in this High Court, being Income-tax Reference Application No. 25 of 1981, for a direction to the Tribunal to state the case on this point. The above two references and the reference application are all still pending. For the reasons set out above, it must be held that in making the impugned order of provisional assessment, the ITO travelled beyond the ambit of a provisional assessment acted in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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