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income-tax Officer Vs. K.V. Zachariah and Sons (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Judge
Reported in(1982)2ITD82(Coch.)
Appellantincome-tax Officer
RespondentK.V. Zachariah and Sons (P.) Ltd.
Excerpt:
.....which was originally completed on 10-5-1976 was reopened, admittedly, on the basis of an audit objection.the commissioner (appeals) held that the assessment has not been validly reopened. he annulled the reassessment. the relevant facts are these : 2. the assessee has been carrying on various businesses, one of which was the production and manufacture of tea. the company had three different estates called melorarn, vadakemala and alangad. these estates have been under tea cultivation from 1934. the assessee found that there was continuous loss in these and, therefore, took up a phased programme of planting these estates with rubber in place of tea.in the directors' report, for the year ended 31-3-1974, submitted at the 25th annual general meeting of the shareholders, held on.....
Judgment:
1. This is an appeal by the revenue against the order of the Commissioner (Appeals), Kerala, Ernakulam, for the assessment year 1975-76. The appeal before the Commissioner (Appeals) was against a reassessment made by the ITO under Section 147(6) of the Income-tax Act, 1961 ('the Act'). The assessment which was originally completed on 10-5-1976 was reopened, admittedly, on the basis of an audit objection.

The Commissioner (Appeals) held that the assessment has not been validly reopened. He annulled the reassessment. The relevant facts are these : 2. The assessee has been carrying on various businesses, one of which was the production and manufacture of tea. The company had three different estates called Melorarn, Vadakemala and Alangad. These estates have been under tea cultivation from 1934. The assessee found that there was continuous loss in these and, therefore, took up a phased programme of planting these estates with rubber in place of tea.

In the directors' report, for the year ended 31-3-1974, submitted at the 25th Annual General Meeting of the shareholders, held on 31-10-1974, the following passage appears: Meloram, Vadakemala and Alangad have been mainly tea properties for the past 40 years. But as the company was continuosly losing on tea, a phased programme of planting with rubber was taken up. As a result, we have closed down our Vadakemala Tea Estate from 1-4-1973 and Meloram Tea Estate from 5-5-1973. The entire area of Vadakemala is now a rubber estate. The major portion of Meloram has already been converted to rubber and by the end of 1974-75 the entire area will be under rubber. Alangad Tea Estate has been temporarily closed down. As the Alangad cardamom estate is not economical, due to unfavourable climatic conditions and now low yield, the company has asked the Collector of Idikki for permission to convert it into a coffee estate.

A similar reference has been made also in the report for the year ended 31-3-1975, made to the general body on 30-9-1975. The following sentence thus appears: It is to be specially noted that as mentioned in the last annual general meeting, the entire tea area except Alangad Division, has been converted to rubber by the end of the year under review and we have disposed of the Maloram Tea factory for a consideration of Rs. 1,10,000.

In the profit and loss account for the year ended 31-3-1975, the previous year for the assessment year under appeal here, a sum of Rs. 330.60 has been shown credited as sale proceeds of tea. The original assessment was completed on 10-5-1976. In this the ITO computed a loss of Rs. 17 under the head 'profits and gains of business'. This was calculated by deducting from the sale of tea of Rs. 331, the opening stock value of Rs. 331 and the expenses of Rs 17. Against this loss was set off, the profit on the sale of machinery referred to in the directors' report for this year. The profit was worked out at Rs. 77,246. This profit is included in the assessment under Section 41(2) of the Act. After adjusting this profit, the balance income under the head 'Business' was taken at Rs. 77,229. This was again adjusted against the loss of Rs. 4,718, for the .assessment year 1967-68, Rs. 9,068 for 1969-70, Rs. 9,440 for 1970-71, Rs. 5,134 for 1971-72, Rs. 34,158 for 1972-73 and Rs. 31,872 for 1973-74. As the total of these losses amounted to Rs. 89,672 there was a balance loss of Rs. 17,161, relating to the assessment year 1973-74. The ITO also stated in the assessment order that this sum of Rs. 17,161 is not allowed to be carried forward, as the assessee has discontinued the business.

3. Subsequent to the completion of the assessment, there was an audit objection. This audit objection has been extracted completely, in para 2 of his order, by the Commissioner (Appeals). After referring to the fact of stoppage of business, as has been mentioned in the directors' report, for the accounts pertaining to the assessment year 1974-75, the audit note also refers to the fact that, during the previous year for this assessment year, the assessee sold tea worth Rs. 330.60, which was the opening stock available and then concludes that it was evident from this that the assessee ceased to carry on the business.

4. On receipt of the audit objection, the ITO reopened the assessment under Section 147(6). He did not accept the contention of the assesee that the audit objection cannot be a ground for reopening the assessment, and that the audit party is not entitled to interpret law.

For this he relied on the decision of the Supreme Court in the case of R.K. Malhotra, ITO v. Kasturbhai Lalbhai [1977] 109 ITR 537 and also on another decision of the Supreme Court in Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287. He also did not accept another contention advanced by the assessee that the business was carried on during the year. He was of the opinion that the mere disposal of the closing stock brought forward from the preceding accounting year, after the business is closed, cannot be considered as a continuation of business. He rejected another contention of the assessee that the Explanation to Section 41(2) should be taken to its logical conclusion and, therefore, the business must be deemed to be in existence during the previous year.

The assessee filed an appeal challenging both the reopening and the merits of the assessment. The Commissioner (Appeals) held that this was not a case where the audit has merely drawn the attention either to a factual position or to a point of law, arising out of an authoritative decision, by way of judicial interpretation. He has pointed out that the records show that the assessee had shown the unabsorbed losses in the return of income, that the ITO had applied his mind to it and held that it was allowable in the original proceedings. In effect, he considered that, in view of the decisions of the Supreme Court in CIT v. Bipinchandra Maganlal & Co. Ltd. [1961] 41 ITR 290, CIT v. Express Newspapers Ltd. [1964] 53 ITR 250 and Cambav Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, and of the Kerala High Court in CIT v. Official Liquidator, New Era Mfg. Co. Ltd. [1977] 109 ITR 262, the audit objection must be considered to be interpretative of a point in law and, therefore, cannot constitute "information", for the purpose of invoking Section 147(6). He did not go into the merits of the case since he was cancelling the reassessment proceedings.

5. In its appeal the revenue has taken two objections. The first objection is against the order of the Commissioner (Appeals), that the reassessment has not been validly initiated. The second objection is that the Commissioner (Appeals) should have held that there was no unabsorbed loss, relating to the previous year in which the business was started and, therefore, no loss, brought forward from earlier years, can be set off against the income assessed under Section 41(2).

In elaboration, it has been urged by the departmental representative that the audit has merely referred to the directors' report for the year ended 31-3-1974, wherein it has been stated that the business has been closed down. This is a reference to a point of fact, without any overtones of legal interpretation and, therefore, would constitute valid information for the purpose of Section 147(6). On the second ground in its appeal, the departmental representative points out that the Explanation to Section 41(2) is limited to the purpose of deeming the continued existence of the business, in order to enable the application of Section 41(2), in respect of a discontinued business. It is submitted that Section 41(2) and the Explanation thereof should be read with Section 41(5) of the Act which limits the setting off of the loss against the income under Section 41(2), to the loss sustained in the year in which the business was discontinued and not for the earlier years.

6. On behalf of the assessee it is submitted that the audit objection should be considered as interpreting a position in law. It is pointed out that the ITO, while making the original assessment, has proceeded on the basis that the assessee has carried on a business during part of the previous year. It is pointed out that the ITO's action in the original assessment proceedings is due to the fact that the assessee has sold some tea in the initial part of the accounting year. This conclusion of the ITO is based on a factual material. The ITO, in the original assessment, has considered the circumstances and facts and came to the conclusion that the assessee has carried on its business during part of the accounting year. The audit objection, which has come to a contrary conclusion, on the same set of facts, is really on the question of interpreting whether the assessee has carried on a business during the previous year or not. This, thus, amounts to an interpretation of law by the audit party and, therefore, would not amount to an information, for the purpose of Section 147(6). On the merits, it is submitted that the fiction created by the Explanation to Section 41(2) should be taken to its logical conclusion. It is submitted that even if the assessee had not, in fact, carried on a business during the previous year, it must be taken, for all purposes, that the assessee has carried on the business during the previous year for this assessment. If that conclusion is reached, then the assessee would be entitled to the set off of the losses brought forward from the assessment year 1969-70.

7. We have carefully considered these submissions. We are of the opinion that the ITO has not assumed valid jurisdiction under Section 147(6). The question whether the action taken by him is valid in law would depend upon whether the audit objection has merely pointed out a fact to the ITO, namely, that the assessee closed down its business, or whether it has, by a process of reasoning, interpreted a legal position on this question, viz., whether, in the facts and circumstance, the assessee could be considered to have carried on the business during the previous year, for this assessment year. The audit objection has been extracted by the Commissioner (Appeals). As has been pointed out earlier in this order, the audit has not merely referred and pointed out a statement contained in the directors' report, for the year ended 31-3-1975. This report of the directors' no doubt speaks of the closing down of the business on a particular day, viz., 5-5-1973. But the audit has made a reference also to the factum of sale of tea, worth Rs. 330.60. The penultimate sentence in this particular paragraph in the audit report, clearly shows that the audit on the basis of this material interpreted a question of law, namely, whether the assessee has carried on the business during the previous year, in the light of the directors' report for the year ended 31-3-1974, and the sale of tea worth Rs. 330.60. In this view of the matter it must be held that the audit objection would not constitute information for the purpose of Section 147(6). We would, therefore, hold that the reassessment has not been validly initiated by the ITO.8. On the merits of the issue, we are' of the opinion that it cannot be inferred, merely from the report of the directors, that the business of the assessee in tea has been discontinued, prior to the beginning of the previous year for this assessment year. ]t is true that the directors have reported to the shareholders, even in respect of the year ended 31-3-1974, that the business of this particular tea estate has been closed down on 5-5-1973, which is before the beginning of the previous year for this assessment year. However, this statement of the directors should be viewed in the light of the sales of tea, that have taken place during the previous year for this assessment year. We would, therefore, conclude that the statement of the directors was essentially a declaration that no further tea would be processed or manufactured after 5-5-1973, and that the business would be closed down after all the tea on hand is sold. Since the tea has been sold completely only in the previous year for this assessment year, it must be taken that the assessee has carried on the business, in fact, during the previous year for this assessment year. If that is the position, then the action of the ITO, in the original assessment, in allowing the set off of the losses from 1969-70 onwards, is in order. We would, therefore, reject the third ground taken by the revenue in its appeal.


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