R.L. Gulati, J.
1. This is a petition under Article 226 of the Constitution challenging an assessment order under the Income-tax Act, 1961,
2. The petitioner is a company registered under the Indian Companies Act, 1913, having its registered office at Kanpur. The company owns and runs a mill for the manufacture of synthetic fibre, such as nylon filament yarn, metallic cops, nylon staple fibre, etc. The accounting year adopted by the company ended on 30th June, each year. It appears that the company wanted to change its accounting year to end on 31st December, each year, instead of 30th June. In other words, the company wanted to adopt the calendar year as its previous year. The company accordingly on 14th June, 1971, applied to the Income-tax Officer for permission to change the previous year. The following reasons were stated for the change in its letter dated 14th June, 1971 :
'1. We are unable to prepare our accounts by 30th June and have regularly taken permission from the Registrar of Companies for extension in the date of holding annual general meeting for presentation of annual accounts. This is mainly because of summer vacations and marriage season immediately preceding 30th June, which hampers the finalisation of accounts as a large number of staff go on leave.
2. Many Government and semi-Government bodies demand statistical and other information for the calendar year and we have to make a lot of adjudgments to arrive at these figures.
3. We wish to fall in line with many other companies who adopted calendar year as their previous year.'
Shri G.N. Srivastava, Income-tax Officer, Special Circle, C Ward, Kanpur, in whose jurisdiction the petitioner's case fell, granted the permission on 22nd June, 1971, on the following conditions :
'You are allowed to change the accounting year from the one ending 30th June to the one ending 31st December. The previous year for the assessment year 1972-73 will, therefore, comprise of a period of 18 months commencing from 1st July, 1970, to 3Ist December, 1971, and it will be assessed as one unit. It will be subject to the following conditions :
(a) that the said change is not on account of the fact that there could be profit for the first 12 months which would be offset by the loss in the next six months;
(b) that no amalgamation/reconstruction of this company would be allowable with any other company which will adversely affect the revenue during the accounting year ending December 31, 1971 ;
(c) that the depreciation, etc., would be admissible according to the rule;
(d) that the said change should not result in the reduction of tax liability including surtax.'
Accordingly, the company filed its return for the assessment year 1972-73, on 30th September, 1972, showing its income for the period of 18 months from 1st July, 1970, to 31st December, 1971. It may be stated here that the company had added two more units for the production of nylon staple fibre and nylon tyre cord. These two units went into production on 15th November, 1971, and 19th November, 1971, respectively. Separate accounts were maintained by the company in respect of these two units and they were closed on 31st December, 1971. The profit and loss arising out of these two units was also included in the return filed by the company on 30th September, 1972. No steps were taken by the Income-tax Officer to complete the assessment which remained pending until 16th April, 1974, when the company filed a revised return showing a total income of Rs. 1,63,28,627. In the meantime, respondent No. 1, Sri O. S. Bajpai, Income-tax Officer, Central Circle V, Kanpur, came to acquire jurisdiction over the petitioner's case. On 10th April, 1975, he informed the company that it would not be possible to accept the change of the previous year as granted by his predecessor. He gave the following reasons for not accepting the change:
'Since you are seeking to set off the loss of next six mouths arising mainly due to losses in SSF and Tyre Cord Units, it would not be possible to allow the change in the previous year in view of the above condition imposed. Please also give break-up of profits for 12 and 6 months, respectively,
The other condition that the said change should not result in the reduction of tax liability is also not satisfied so far as the assessment year 1972-73 is concerned. To the extent the loss arising during the later six months is being sought to be set off with the profits of the earlier 12 months, there is a definite reduction in the tax liability.'
3. The petitioner-company was allowed time till 14th April, 1975, to file its objections. On that date the company filed a written reply and requested for further time to enable it to file a detailed reply after consulting its counsel at Delhi. In the interim reply the company stated that it had not violated any of the conditions imposed by the Income-tax Officer and in any case, since the accounts had already been made up to 31st December, 1971, and the accounts for subsequent years had also been closed on that basis, it was no longer open to the Income-tax Officer to compel the company to revert to the accounting year ending on 30th June. It was also stated that the synthetic staple fibre and tyre cord units had been newly set up in November, 1971, and constituted a separate and distinct source of income and since it was the first year of accounting the company had the option to choose its own previous year. The company had closed the accounts of these two units on 31st December, 1971, in accordance with the option granted to it by the Act, In other words, it was stated that whatever might be the position with regard to the business already in existence, the previous year in respect of the two newly added units could not be disturbed.
4. The Income-tax Officer did not pay any heed to the request of the company for further time and proceeded to pass an assessment order the same day, namely, 14th April, 1975. He refused to accept the change of the previous year from 30th June to 31st December and after computing the profits for 18 months on the basis of the assessee's accounts he determined the proportionate profits for the 12 months ending on 30th June, 1971, and made as assessment accordingly. In doing so he ignored completely the loss and depreciation relating to the newly added units. He held that as the company had failed to comply with two of the conditions imposed by the Income-tax Officer, the permission already granted for the change of the accounting period stood withdrawn. As against the returned income of Rs. 1,63,28,627, the Income-tax Officer computed the income at Rs. 11,47,13,978. The petitioner has challenged this order by this writ petition on a large number of grounds.
5. Before we deal with the contentions on merits we must dispose of a preliminary objection. It is urged that there is a right of appeal against the assessment order and an appeal, in fact, has been filed by the company, which is pending, and, therefore, we should not interfere under Article 226 of the Constitution. It is, however, not disputed that the existence of an alternative remedy is not an absolute bar to the exercise of jurisdiction under Article 226 of the Constitution. If an order has been passed in violation of the principles of natural justice, is without or in excess of jurisdiction or sutlers from a patent error, the existence of an alternative remedy notwithstanding, this court can legitimately interfere. We shall presently show that the impugned assessment order suffers from all the three infirmities. It has been passed in violation of the principles of natural justice, is in excess of jurisdiction and is palpably erroneous. That apart, Mr. Mehta, the learned counsel appearing for the company, has made a statement that in case the assessment order is not quashed, he will not press before the appellate authority the grounds raised in this writ petition. In view of this statement, we overrule the preliminary objection.
6. We shall first demonstrate how the impugned order contravenes the principles of natural justice. The petitioner-company applied for the change of the accounting year on 14th June, 1971, and the necessary permission was granted by the Income-tax Officer on 22nd June, 1971. Both these dates are prior to 30th June, 1971, when the company was supposed to have closed its accounts. In pursuance of the order granting permission to change the accounting year, the petitioner-company applied for and obtained the permission to change its financial year from the Registrar of Companies on 26th August, 1971. Accordingly, the company did not close its accounts on 30th June and allowed them to run up to 31st December, when the accounts were finally closed. After the accounts were passed by the board of directors and the shareholders the company filed its return on 30th September, 1972. The Income-tax Officer did not take any action on the return and allowed the case to remain pending for a long time. Thereafter, the company filed a revised return on 16th April, 1974. It is clear that the stakes in the case were very heavy inasmuch as a tax of several crores was involved. The Income-tax Officer even then did not take any further proceedings. Normal period of limitation for an assessment in a case like the petitioner's is two years from the end of the assessment year in which the income becomes first assessable as provided by Clause (iii) of Sub-section (1) of Section 153. Thus, the last date of limitation for completing the assessment was 31st March, 1975. The limitation, however, stood extended up to 15th April, 1975, as a result of the filing of the revised return as provided under Clause (c) of Section 153(1). The Income-tax Officer took up the assessment proceedings for the first time in September, 1974. Recalled for some routine statements and information and also the production of accounts but he did not raise any question with regard to the change of the previous year, even though the return related to a period of 18 months instead of the normal period of 12 months. For the first time on 10th April, 1975, the Income-tax Officer issued a letter indicating that he was not prepared to allow the change of the previous year on the ground that the company had not complied with certain conditions imposed by his predecessor at the time of granting the permission. This letter was served on the company in the afternoon of 11th April, 1975. The company was required to submit its reply on or before the 14th April, 1975. Twelfth April was a Saturday and 13th April was a Sunday. The company, therefore, legitimately made a grievance that the time allowed to it was very short. It filed an interim reply on 14th April, 1975, and requested the Income-tax Officer to grant further time so as to enable it to submit a detailed reply after consulting its legal advisers at Delhi. The Income-tax Officer ignored this request and completed the assessment on 14th April, 1975, itself. The assessment order runs into 65 pages involving a complicated figure work relating to the computation of income and calculation of depreciation and development rebates, etc. The contention of the learned counsel for the company is that it was not possible for the Income-tax Officer to have written out such a long and complicated assessment order in one day on the 14th April, 1975. According to him the Income-tax Officer had already written out the assessment order and the issue of a show-cause notice was merely an eye wash. This argument is not altogether devoid of force. It looks highly improbable that the Income-tax Officer could have passed the impugned order, which indeed is a lengthy and complicated one, on the 14th April, 1975, after hearing the company. However, it is not necessary to record any firm finding on this point because we are otherwise satisfied that the petitioner was denied a reasonable opportunity to meet the case set up by the Income-tax Officer. As we have indicated above, the stakes were very heavy. The petitioner-company had declared an income of Rs. 1,53,28,627 and as against this figure the Income-tax Officer computed the income at Rs. 11,47,13,978 and raised an additional demand of Rs. 7,17,89,421. This is a colossal demand which if unjustified can threaten the very existence of the company. In the circumstances, it was absolutely necessary for the Income-tax Officer to have allowed adequate opportunity to the assessee-company to explain its case. The two days' period allowed by the Income-tax Officer, in our opinion, was wholly insufficient. The request of the company for a longer time was completely justified. It is true that the Income-tax Officer was hard pressed for time as the limitation for making the assessment was to expire on the following day, i.e., on 15th April, 1975 ; but for this the Income-tax Officer alone was to be blamed. The company on its part had done all that it could do. It filed the original return as early as on 30th September, 1972. Even the revised return was filed on 10th April, 1974, and the Income-tax Officer had a period of one year from that date to complete the assessment. But for reasons best known to him he did not take up the assessment proceedings until the fag end of the limitation. Had the Income-tax Officer taken up the case well in time, this situation might have been averted. Even if there was very little time at the disposal of the Income-tax Officer, because of the approaching limitation, he could not violate the principles of natural justice. The argument that the Income-tax Officer was hard pressed for time is an argument of despair which cannot be allowed to alter the course of justice. The predicament in which the Income-tax Officer found himself was his own creation. We cannot allow the petitioner to suffer injustice. A similar argument was raised before the Supreme Court in Commissioner of Income-tax v. Ranchhoddas Karsondas : 36ITR569(SC) . and this is how the Supreme Court disposed of that objection :
'Mr. Rajagopala Sastri pointed out that an assessee might file the 'voluntary' return on the last day showing income less than the taxable limit and the department would, in that case, be driven to complete the assessment proceedings within a few hours or lose the right to send a notice under Section 34(1). An argument ab inconvenienti is not a decisive argument. The Income-tax Officer could have avoided the result by issuing a notice under Section 23(2) and not remaining, inactive until the period was about to expire.'
The same can be said in the instant case. If the Income-tax Officer had not remained inactive for such a long time the situation he found himself in would not have been precipitated. We have, therefore, no hesitation in holding that the company was denied a reasonable opportunity and the impugned order contravenes the principles of natural justice and for that reason is void.
7. We, however, do not propose to stop short here. There are certain points in the assessment order in respect of which the Income-tax Officer has taken a palpably erroneous view. If we do not give an authoritative pronouncement, at this stage, he is likely to repeat the mistakes in the fresh assessment order which he might like to pass after the impugned order is quashed. This will avoid multiplicity of proceedings and consequential hardship to the company. We shall, therefore, deal with the contentions raised by the company on merits.
8. The first question to be decided is whether the Income-tax Officer was justified in law in recalling the permission granted to the company to change its previous year from 30th June to 31st December, Section 3 of the Act contains the definition of the 'previous year' which means the accounting year. According to this definition the previous year means the financial year immediately preceding the assessment year or if the accounts of the assesses have been made up to a different date within the said financial year then at the option of the assessee the 12 months ending on such date. Sub-section (4) of Section 3 deals with a situation whore an assessee has already chosen a previous year and wants to change it. This sub-section leads:
'Where in respect of a particular source of income or in respect of a business or profession newly set up, an assessee has once exercised the option under Clause (b) or Sub-clause (ii) of Clause (d) or Sub-clause (i) of Clause (e) of Sub-section (1) or has once been assessed, then, he shall not, in respect of that source, or, 'as the case may be, business or profession, be entitled to vary the meaning of the expression 'previous year' as then applicable to him, except with the consent of the Income-tax Officer and upon such conditions as the Income-tax Officer may think fit to impose.'
9. In effect, Sub-section (4) of Section 3 provides that if an assessee has already chosen a previous year he shall not alter it without the permission of the Income-tax Officer. It is under this provision that the company applied for permission to change its previous year and the Income-tax Officer allowed the change on certain conditions, which we have already reproduced above. It is not disputed that the conditions which the Income-tax Officer can impose must be valid and legal besides being reasonable. He cannot impose conditions which are contrary to the provisions of the Income-tax Act.
10. There is no dispute about conditions (b) and (c). The company has not violated these conditions. The conditions (a) and (d) are the two conditions which the company is alleged to have contravened. Condition (a) is not happily worded and is not easily understandable. What, in effect, it means is that the company should not show a loss for the last six months of the previous year of 18 months which may be set off against the profits of the first 12 months. This appears to be an impossible condition. No assessee can be asked to ensure that he will not suffer a loss during a particular period. To say that if a loss arises in the last six months it shall not be set off against the profits of the first 12 months is again a palpably illegal condition. A previous year whether it consists of 12 months or less or more is a unit of assessment and all the profits and losses arising in that previous year have to be taken into consideration. Section 4, which is the charging section, levies a charge on the income of the full previous year. In the case of a business, tax has to be levied on the profits and gains of the previous year. Profit here means the net profit ascertained after setting oft losses and expenses against the gross profit. A reference may be made in this connection to the observations of Lord Parker in Usher's Wiltshire Brewery Ltd. v. Bruce,  6 TC 399.
'......where a deduction is proper and necessary to be made in orderto ascertain the balance of profits and gains, it ought to be allowed......provided there is no prohibition against such an allowance......'
Therefore, in a previous year a loss arising from any activity has to be necessarily set off against the profits arising from other activities. It is only then that we can arrive at the net profits. It was, therefore, not open to the Income-tax Officer to stipulate that there shall be no loss in a part of the previous year or that if there was a loss, it shall not be allowed to be set off against the profits arising in the previous year. Such a condition was clearly contrary to the law and the Income-tax Officer had no jurisdiction to impose such condition.
11. The condition (d) is again an ambiguous condition and wholly superfluous. It is not clear as to what exactly the Income-tax Officer meant by saying that the change in the previous year should not result in the reduction of tax liability including the sur-tax. That, in fact, is not a condition to be imposed upon an assessee but is a consideration which has to be kept in mind by the Income-tax Officer while permitting the change of the previous year. He has to see that as a result of the change the assessee does not gain an undue advantage by way of reduction in tax liability. If he apprehends that there will be a reduction in tax liability, he can impose suitable conditions to guard against it. But to say that there will be no reduction in tax liability as a result of the change in the previous year is by itself not a condition.
12. If the Income-tax Officer meant that the tax on the income of the original previous year should not be less than the income of the changed previous year, he was clearly imposing an impossible condition. The tax liability depends directly on the quantum of income and if the income varies the tax liability is bound to vary. No one can prevent it. Once the length of the previous year is fixed the income of that previous year has to be taxed, whether the income is less or more than the income of the original previous year. One can conceive that there may be reduction in tax liability as a result of a change in the rate of tax. Rate of tax is prescribed by the Finance Act of every year. A previous year normally consists of a period of 12 months and the income of a period of 18 months would, under normal conditions, be assessed in two assessment years. If the company had not changed the previous year, the income of the period of 12 months ending on 30th June, 1971, would be assessable in the year 1972-73 and the income of the remaining six months would have been assessable in the assessment year 1973-74. If the rate of tax for the year 1973-74 were to be enhanced, the Income-tax Officer could stipulate that while the income of the first 12 months will be assessed at the rate prescribed by the Finance Act of 1972-73 the income of the remaining six months would be taxed at the rate prescribed by the Finance Act of 1973-74. That could be one way of safeguarding the interest of the revenue. But that is not the condition imposed by the Income-tax Officer. In view of the decision of the Supreme Court in Esthuri Aswathiah v. Commissioner of Income-tax : 60ITR411(SC) . it is doubtful if even such a condition could be imposed. The length of a previous year is normally 12 months but the Income-tax Officer can vary the length of the previous year by way of a condition upon which he permits the change of the previous year. Once the length of the previous year is fixed, the entire income of that previous year has to be taxed at the rate specified in the Finance Act relevant to the previous year. In the case of Esthuri Aswathiah the previous year consisted of 21 months as a result of the change allowed by the Income-tax Officer under Section 2(11) of the Indian Income-tax Act, 1922, which corresponds to Section 3 of the Income-tax Act, 1961. The Supreme Court held that the income of the entire previous year consisting of 21 months had to be taxed at the rate prescribed in the relevant Finance Act. The contention of the assessee that the Income-tax Officer should have assessed the total income at the rate applicable to the income of the last period of 12 months was rejected in the following words at page 416:
'Mr. Srinivasan alternatively submitted that the Income-tax Officer could accord sanction to the change on the basis that the income for 21 months should be assessed at the rate applicable to the income of the last period of 12 months. This again is an impossible contention. The Income-tax Officer has no power to vary the rate at which the income of the previous year is to be assessed. The rate of tax is fixed by the Finance Act of every year. By Section 3 the tax is levied at that rate for an assessment year in respect of the income of the previous year. Once the length of the previous year is fixed and the income of the previous year is determined, that income must be charged at the rate specified in the Finance Act and at no other rate. The order of the Income-tax Officer, in substance, permitted the change of the previous year on condition that the previous year in relation to the assessment year 1952-33 would consist of the period of 21 months commencing from July 1, 1950, and ending on March 31, 1952. The Income-tax Officer had power to impose this condition. The further condition that the income of the previous year of 21 months would be assessed at the rate applicable to the income for 21 months is redundant. Once the length of the previous year is found to be a period of 21 months, the income of the entire period of 21 months must be considered to be the income of the previous year relevant for the assessment year 1952-53, and the entire income must be assessed at the rate specified in the relevant Finance Act.' Incidentally, this decision shows that enlarging the period of the previous year beyond 12 months is by itself a condition which the Income-tax Officer can impose to safeguard the interest of the revenue. In the instant case, when the Income-tax Officer permitted the previous year to consist of 18 months that by itself was a condition enough to safeguard the interest of the revenue. No further condition was necessary.
13. It is argued on behalf of the respondents that the company had accepted the conditions voluntarily and with eyes open and it should not be allowed to challenge their validity. This is not a correct proposition. It is well settled that there is no estoppel against law. The Income-tax Officer is authorised to impose only valid conditions and if the conditions imposed by him turn out to be invalid, they can be challenged and struck off.
14. Before passing on to the next point we might notice another argument raised on behalf of the petitioner-company. It is urged that, once a change of the previous year is allowed on certain conditions and the decision of the Income-tax Officer has been given effect to, the Income-tax Officer cannot withdraw the permission and make an assessment on the basis of the old previous year. At best he can make certain adjustments in the assessment order to counteract any undue advantage gained by the company as a result of the non-fulfilment of the conditions. On behalf of the respondents it is urged that the permission being a conditional one, the permission failed when the conditions were not complied with. We do not propose to decide this controversy in view of our findings that the two conditions which the company is alleged to have contravened were not valid conditions. However, it does appear that the stand taken by the respondents will create complications. Once an assessee makes up his accounts to a particular date, he cannot write back the accounts to close them on an earlier date. The law, of course, does not indicate as to what would be the consequence if a condition imposed on the change of the previous year is not complied with by an assessee. At the same time the law does not provide that the permission can be revoked and the old previous year can be adopted. Such a course appears to us to be extremely difficult, if not impossible.
15. The alternative contention of the company is that in respect of the two newly added units it had the option to choose a previous year ending 31st December, 1971, and once the company had exercised that option, it was not open to the Income-tax Officer to interfere with it. That option was not subject to the conditions imposed by the Income-tax Officer which related only to the existing business. It is not necessary to decide this contention in view of the findings already recorded but we cannot help saying that here also the approach of the Income-tax Officer is entirely wrong. It is open to an assessee to have different previous years for different sources of income. In fact, this has been expressly provided by Sub-section (3) of Section 3 which says:
'Subject to the other provisions of this section an assessee may have different previous years in respect of separate sources of his income.'
It is a matter of common knowledge that under the broad head 'business' one may have several sources of income. Each distinct business activity constitutes a separate source of income. The fact that such a source of income is of the same assessee or is under the same management is no ground for holding that it is not a separate source of income. See Girdharlal Ghelabhai v. Commissioner of Income-tax : 53ITR23(Guj) and Sobhag Mal Lodha v. Commissioner of Income-tax : 63ITR424(All) . The company in this case has contended that separate finance had been provided for the two newly added units and separate accounts were maintained in respect of them. On these facts, it is clear that the two newly added units constituted a separate source of income. As observed by the Privy Council in Rhodesia Metals Ltd. v. Commissioner of Taxes  9 ITR (Supp) 45 the source means not a legal concept but something which a practical man regards as real source of income. In fact each branch of a business can be a separate source of income. An assessee having a head office and a branch office can have two previous years, one for the head office and the other for the branch, even though the business may be the same at both the places. See Commissioner of Income-tax v. Lady Kanchanbai : 44ITR242(MP) .
16. The next point to be considered relates to the deduction claimed by the assessee on account of excise duty payable on one of its products called 'polymer chips'. The excise department has been demanding excise duty on this product under item No. 15-A(iii) of Schedule I of the Central Excises and Salt Act, 1964. The company has been making provision for the payment of such duty every year since 1964-65. This claim was consistently disallowed by the Income-tax Officer but was allowed on appeal by the Appellate Assistant Commissioner of Income-tax and, as a result, a total sum of Rs. 2,87,60,109 had been allowed to the company as a deduction on account of excise duty for the assessment years 1964-65 to 1971-72, as detailed below:
On similar basis the company made a provision of Rs. 2,08,29,486 in respect of its liability to excise duty for the previous year in question. We shall hereinafter refer to this liability as the current liability. It appears that the company has been contesting this demand. On 1st February, 1964, it filed a writ petition under Article 226 of the Constitution before the High Court at Delhi, challenging the order of the Collector of Central Excise demanding duty on polymer chips. This petition was allowed by a learned single judge on 28th August, 1970. On the basis of this judgment the Income-tax Officer has disallowed the deduction claimed by the company in respect of the current liability and has also treated the sum of Rs. 2,87,60,109 on account of the past liability as income under Section 41 of the Act. As a result, he has added to the income of the company an aggregate sum of Rs. 4,95,89,595 (Rs. 2,87,60,109 + Rs. 2,08,29,486).
17. Material portion of Section 41, upon which reliance has been placed by the Income-tax Officer, reads as under:
'41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever. any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.'
In short, what this provision means is that if an assessee has been allowed a deduction in the computation of its total income of any liability on account of loss or expenditure and if, subsequently, the liability of the assessee on account of such loss or expenditure is remitted or ceases, that part of the liability which is remitted or ceases shall be treated to be the income of the assessee of the previous year in which such remission or cessation takes place. Now, admittedly, in the instant case deductions were allowed to the assessee on account of excise duty in the years 1964-65 to 1970-71. If the liability of the assessee can be said to have ceased in the relevant previous year the assessee would clearly be liable to be assessed in respect of such liability. Bat the question is whether the liability can be said to have ceased in the instant case. It is not disputed that the decision of the Delhi High Court has not been accepted by the excise department. It has preferred a Letter's Patent Appeal which has been admitted and is pending. In our opinion, in such circumstances, the liability cannot be said to have ceased. A cessation of liability for the purposes of Section 41(1), of the Act would mean irrevocable cessation so that there is no possibility of the liability being revived in future. If there is such a possibility then the cessation is not complete and Section 41(1) is not attracted. The decision of the Delhi High Court is under appeal and there is a likelihood of its being reversed. It cannot, therefore, be said that on the date when the learned single judge of the Delhi High Court delivered his judgment the liability ceased. Indeed, there might be a further appeal to the Supreme Court. In these circumstances the Income-tax Officer was not competent to invoke the provisions of Section 41(1) of the Income-tax Act because the decision of the learned single judge of the Delhi High Court had lost its finality as a result of the appeal against it. A decision liable to appeal may be final until the appeal is not preferred but once an appeal is filed the decision loses its character of finality and becomes sub-judice, i.e., a matter under judicial enquiry. The appeal destroys the finality of the decision. This is the view expressed by the Calcutta High Court in Satyanarayana Prosad v. Diana Engineering Co : AIR1952Cal124 and the Oudh Chief Court in Girja Dat Singh v. Gangotri Dat Singh AIR 1948 Oudh 88.
18. Indeed, from the facts of the case it appears that the excise department has not given up its claim to levy and collect duty on polymer chips. The company has asserted that the excise authorities are still raising demands against it for the excise duty in spite of the decision of the Delhi High Court which they have not accepted. In these circumstances, Section 41(1), in our opinion, was not attracted at all. The position taken up by the Income-tax Officer is that he should be allowed to levy tax under Section 41(1) in pursuance of the decision of the Delhi High Court and if that decision is modified or reversed by the Special Appeal Bench necessary relief would be granted to the assessee under Section 154 of the Act. That stand is not correct. In the first place, it must be shown that Section 41(1) has become applicable and that provision becomes applicable only when a past liability ceases or is remitted. If the liability has not been remitted or does not finally cease, Section 41(1) is not attracted and the Income-tax Officer cannot be permitted to take recourse to it on the ground that he would be able to undo the mischief later on by giving relief to the petitioner-company under Section 154. We are doubtful if Section 154 will apply at all. That provision is meant for the rectification of a mistake apparent from the record. It has no application where the view of the Income-tax Officer on a particular point turns out to be erroneous. Moreover, there is a period of limitation prescribed for such a rectification. The limitation is four years from the date of the order sought to be amended. If the dispute now pending before the Delhi High Court in appeal is not finally decided within 4 years, the company will have no remedy to claim refund of tax. On the other hand, if the matter is allowed to stand over until the controversy is finally decided the department will not suffer any prejudice because it would then be able to invoke Section 41(1) in the year in which the controversy is finally decided. We thus come to the conclusion that the Income-tax Officer had no jurisdiction to invoke Section 41(1) and to levy tax on Rs. 2,87,60,109.
19. The same is the position with regard to the current liability of Rs. 2,08,29,486. The company's liability to pay excise duty on polymer chips has not been wiped out. We have already mentioned that the excise authorities are still raising demands for the excise duty on polymer chips. We might mention here that item No. 15A of Schedule I of the Central Excises and Salt Act, 1964, has been amended with effect from 29th February, 1974. The judgment of the Delhi High Court does not deal with the duty leviable under the amended provision. For that reason also the decision of the Delhi High Court cannot be said to be final because duty is now being sought to be levied under the amended provisions of the Act. The company, no doubt, is still resisting the claim of the excise authorities, but this fact does not debar the company from claiming deduction on account of the excise duty being demanded from it and for which the company had made provision in its books of accounts. The company is following the mercantile system of accounting and it can legitimately claim deduction in respect of a business liability even if such liability has not been quantified or paid. In Kedarnath Jute Manufacturing Co. v. Commissioner of Income-tax : 82ITR363(SC) the Supreme Court has held that an assessee who follows the mercantile system of accounting can claim deduction under Section 10(2)(xv) in respect of a business liability before it is quantified and even when such liability is being disputed. It has further been held that even if the assessee does not make a provision for such a liability in its books of accounts, he is still entitled to claim deduction because the question whether the assessee is entitled to a particular deduction or not depends upon the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of accounts be decisive or conclusive in the matter. The same view has been taken by this court in Commissioner of Income-tax v. Poonam Chand Trilok Chand : 105ITR618(All) ) where it has been held that a statutory liability is an allowable deduction in the very year to which it relates even though the same is disputed. We, accordingly, hold that the assessee was entitled to claim deduction in respect of the liability of excise duty for which it had made a provision in its account books even though the liability was being disputed in a court of law. We might reiterate here that the revenue will not suffer any loss because if ultimately the liability ceases as a result of the decision of the Delhi High Court or of the Supreme Court, the department can bring it to tax under Section 41(1) of the Act.
20. Before parting with this point, we might refer to the application of the respondents filed on 10th July, 1975, wherein it has been stated that the Bombay High Court in its judgment dated 30th April, 1970, in Nirlon Synthetics v. R.K. Adim, Civil Misc. Writ No. 491 of 1964, decided on 30-4-1970 has held that excise duty is not leviable on polymer chips even under the amended Entry 15A(iii) of the Central Excises and Salt Act, and that the company has relied upon this judgment in its representation to the excise authorities. We fail to understand how this fact alters the situation. The decision of the Bombay High Court has been given in another case and not in the case of the company and admittedly even the decision of the Bombay High Court is under 'appeal. The company might have relied upon the decision of the Bombay High Court as a precedent to support its case but the company is not absolved of its liability to excise duty on account of that judgment. As has been pointed out by the Supreme Court in the case of Kedarnath Jute Mfg. Co. the question whether the company is liable to excise duty or not depends upon the provisions of the law and not on the view which the company might take. The company cannot decide for itself whether it is liable to excise duty or not. Such a question can be decided only by a competent authority or a court of law. As has been pointed out, the decisions of the Delhi and Bombay High Courts are under appeal and the question is, therefore, sub-judice. The Income-tax Officer, therefore, clearly went wrong in disallowing the deduction on account of anticipated liability of excise duty for which the company had made a provision in its books of accounts.
21. This brings us to the last item of dispute, which relates to the claim of the assessee for the deduction out of its total income of an expenditure amounting to Rs. 80,74,010 incurred on scientific research. The company has raised this ground by way of an amendment application which has been allowed as the same is not opposed by the department. Section 35 of the Act deals with the deduction of expenditure on scientific research, both of capital and revenue nature. Sub-section (3) provides :
'(3) If any question arises under this section as to whether, and if so, to what extent, any activity constitutes or constituted, or any asset is or was being used for, scientific research, the Board shall refer the question to the prescribed authority, whose decision shall be final.'
It is apparent that if the Income-tax Officer does not accept the claim of the assessee under Section 35, he has to refer the matter to the Central Board of Direct Taxes and the Board in turn will make a reference to the prescribed authority. The decision of the prescribed authority shall be final. This shows very clearly that neither the Income-tax Officer nor the Board is competent to take a decision on any such controversy. The controversy has to be referred to the prescribed authority which alone is competent to give a decision. Now, in the instant case, the claim of the assessee was referred to the Board and the Board referred the same to the prescribed authority. Admittedly, the prescribed authority had not given its decision before the impugned assessment order was passed. The Income-tax Officer took upon himself to decide the controversy and held that the expenditure claimed by the company was of an ordinary capital nature and did not relate to any research work. Clearly, the Income-tax Officer had no jurisdiction to adjudicate upon the controversy, particularly when the controversy had already been referred to the prescribed authority. He was conscious of this difficulty and that is why he added the following rider in paragraph 47 of his order :
'The matter has already been referred to the prescribed authority under Section 35(3) and this disallowance is subject to the finding of the said authority as was in the assessment year 1971-72.'
In our opinion, the procedure adopted by the Income-tax Officer was wholly unjustified and without jurisdiction. If, under the law, he has no jurisdiction to adjudicate upon a matter, he cannot take a decision final or provisional and make it subject to the decision of the competent authority. This situation appears to have arisen because of the negligence of the Income-tax Officer to refer the matter to the appropriate authority in time. The company had filed its return on 30th September, 1972, where this claim was made. Apparently, the Income-tax Officer was not satisfied with the claim. He ought to have referred the matter immediately to the prescribed authority but he waited until February, 1975, when the reference was made by him. This is evident from annexure 'A' to the counter-affidavit filed by respondent No. 1 in reply to the amendment application of the company. The said annexure reads as under :
'Copy of the office memorandum No. F. 3/1/76 R.A. Cell dated 18th March 1975, from the Deputy Secretary, Department of Science & Technology, New Delhi, addressed to the Ministry of Finance (Shri J. P. Jhunjhunwala, Secretary C.B.D.T.).
Sub : Reference under Sub-section (3) of Section 35 of the Income-tax Act read with Rule 6 of the Income-tax Rules, 1962--Expenditure on Scientific Research--J. K. Synthetics Ltd.--Assessment year 1971-72 to 1973-74.
22. The undersigned is directed to refer to the U.O. Note No. 206/13/75 I.T.A. II dated 24th February, 1975, of the Secretary, Central Board of Direct Taxes, on the subject cited above and to state that the matter is receiving attention of the prescribed authority in this department. The prescribed authority is however of the view that it will not be possible to settle the dispute before 31st March, 1975, as the matter requires to be gone into in its technical details carefully and both the parties have to be heard before a decision in the matter is taken. The Central Board of Direct Taxes may, accordingly, like to issue instructions to the Income-tax Officers concerned to complete the assessment for the assessment year 1972-73, according to their direction before 31st March, 1975, as the assessment of the said year is stated to be getting time-barred after that date. If the income-tax authorities so desire, they may treat the entire capital expenditure claimed to have been incurred by the company on scientific research in respect of that assessment year, as ordinary capital expenditure for the present, subject, however, to a review thereof after the findings of the prescribed authority have been communicated to them.' It is obvious from this document that the prescribed authority was not able to make up its mind within the short time left at its disposal. To get over this difficulty the prescribed authority directed the Board to issue instructions to the Income-tax Officer to complete the assessment before the expiry of the limitation treating the entire capital expenditure claimed to have been incurred by the company on scientific research as ordinary capital expenditure for the present subject to review after the decision of the prescribed authority was received. It appears that on the basis of this letter the Board issued instructions to the Income-tax Officer to complete the assessment before the expiry of the period of limitation and to disallow the expenditure holding it to be ordinary capital expenditure and to make his decision subject to review after the receipt of the findings of the prescribed authority. That is why the Income-tax Officer added the rider in para. 47 quoted above. It is clear that both the prescribed authority and the Board acted beyond their jurisdiction. An Income-tax Officer acts as a quasi-judicial authority when he deals with an assessment. The assessment order is a quasi-judicial order. The power to decide controversies in assessment proceedings has been exclusively vested in him. He cannot seek guidance from any source or authority nor is any authority empowered to issue to him any direction or instruction in this behalf. The Board, no doubt, is the supreme authority under the Income-tax Act and under Section 119, the Income-tax Officer is bound to follow the orders, directions and instructions of the Board but such instructions, in our opinion, must relate to his executive functions. No instruction can be issued to him with regard to any controversy arising before him in an assessment proceeding. In S.B. Adityan v. First Income-tax Officer, : 52ITR453(Mad) the Madras High Court had to deal with a similar question under Section 5(8) of the Indian Income-tax Act, 1922, which corresponds to Section 119 of the Income-tax Act, 1961. This is what their Lordships observed at page 460 :
'Whatever may be the true position of the Board, as the topmost administrative authority, it cannot, in our opinion, tell the assessing authority, the Income-tax Officer, what to do and what not to do in regard to a particular assessment. It would not follow from Section 5(8) that except the Appellate Assistant Commissioner, the other authorities would be subject to the control of the Board in the matter of any assessment. The Board with all the plenitude of its powers cannot direct any Income-tax Officer to tax 'A' or not to tax 'B' . Such a power if assumed to exist in the Board would be calculated to deprive the assessing officer of his statutory function and would be against the grain of the judicial powers which the officer is supposed to exercise.'
The same is true about the prescribed authority. It has been given the power to decide a question arising with regard to the admissibility of deduction under Section 35, in case the Income-tax Officer does not accept the assessee's claim but it has no power to issue directions to the Income-tax Officer directly or indirectly to decide the issue against the assessee and to make his decision subject to review. In fact, the Income-tax Officer has got no power of review under the Act, except the limited powers of rectification of mistakes apparent on the face of record, under Section 154.
23. We are conscious of the fact that the prescribed authority was not able to render its decision before the expiry of the limitation for assessment and the Income-tax Officer was in a predicament. In such a situation perhaps he could allow the company's claim and later on invoke the provision of Section 148 read with Section 147(b), Explanation 1(b), to bring to tax the excessive relief allowed to the company but he had no jurisdiction to disallow the claim under the instructions of the Board and to make his decision subject to review. The procedure adopted by the Income-tax Officer is wholly unauthorised and without jurisdiction.
24. We, accordingly, allow this petition and quash the impugned assessment order, a copy whereof is annexure 'H' to the writ petition. The Income-tax Officer is directed to make a fresh assessment in accordance with law and in the light of the observations made hereinabove taking the previous year as ending on 31st December, 1971. The assessee is entitled to the costs.