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income-tax Officer Vs. Kailash Chand Maheshwari - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Amritsar
Decided On
Judge
Reported in(1982)2ITD255(Asr.)
Appellantincome-tax Officer
RespondentKailash Chand Maheshwari
Excerpt:
.....the actual deduction under section 80j was immaterial, and what was important was that whether the assessee-company was entitled to deduction under section 80j. she accepted the plea of the assessee and held that the decision of the supreme court in the case of union of india v. coromandel fertilizers ltd. [1976] 102 itr 533 supported the case of the assessee. in view of the above decision, the aac directed the ito to allow deduction under section 80k in the hands of the appellant.5. the departmental appeal is on the merits of the directions of the aac, whereas the cross-objection by the assessee challenges the validity of the reassessment proceedings. we proceed to consider the question of the validity of the proceedings and then proceed to consider the correctness of the directions of.....
Judgment:
1. This appeal by the department and the cross-objection by the assessee are directed against the order of the A AC for the assessment year 1975-76.

2. The assessee derived income from dividends, apart from the other sources, and in this year he had received dividends from Partap Steel Rolling Mills (P.) Ltd., Chheharfa, to the extent of Rs. 8,600. The original assessment in this case was made on an income of Rs. 76,050, by an order dated 29-11-1975. The claim of the assessee under Section 80K of the Income-tax Act, 1961 ('the Act'), in respect of the above dividends had been allowed in full. The ITO later on, received a letter from the IAC on 7-3-1980. In this letter, the IAC informed the ITO that as per the assessment order passed in the case of Partap Steel Rolling Mills (P.) Ltd., it had been determined that the dividends declared for the assessment year 1975-76 did not qualify for deduction under Section 80K. It may be mentioned that the assessment order in the case of the limited company had been passed on 12-9-1978. On the basis of the above letter of the IAC, the ITO proceeded to re-open the assessment of the assessee and other shareholders similarly situated. The ITO recorded reasons for such reopening on 19-3-1980 and issued notice for reassessment for the assessment year 1975-76, under Section 147(b) of the Act.

3. The ITO then proceeded to make the assessment, in which he made reference to the assessment order in the case of the company. He found that though an amount of Rs. 4,07,828 had been determined as the amount which could have been deducted under Section 80J of the Act, no profit in fact was deducted as the net result of the new industrial undertaking, after deducting depreciation and development rebate, was a minus figure. He also mentioned that the deduction admissible under Section 80J had been carried forward to be adjusted in later years. On the basis of this, he concluded that the assessee could not get any benefits of deduction under Section 80K. The [TO repelled the contention of the assessee regarding the re-opening of the assessment.

He pointed out that at the time of original assessment, the assessment of the company had not been made and there was no information available to indicate the extent of the amount of exemption under Section 80K, in respect of the dividends received by the assessee. The exemption earlier granted under Section 80K was, therefore, withdrawn.

4. Before the AAC the assessee challenged the correctness of the reassessment proceedings and also challenged the action of the ITO in withdrawing the deduction allowed earlier under Section 80K. The AAC upheld the reopening of the assessment as she found that the proceedings had been taken under Section 147(6) and the ITO had received information after the completion of the original assessment.

According to her, on the basis of this information the ITO could have reason to believe that excessive relief had been allowed to the assessee in the original assessment. The AAC, however, held that the actual deduction under Section 80J was immaterial, and what was important was that whether the assessee-company was entitled to deduction under Section 80J. She accepted the plea of the assessee and held that the decision of the Supreme Court in the case of Union of India v. Coromandel Fertilizers Ltd. [1976] 102 ITR 533 supported the case of the assessee. In view of the above decision, the AAC directed the ITO to allow deduction under Section 80K in the hands of the appellant.

5. The departmental appeal is on the merits of the directions of the AAC, whereas the cross-objection by the assessee challenges the validity of the reassessment proceedings. We proceed to consider the question of the validity of the proceedings and then proceed to consider the correctness of the directions of the AAC on merits.

6. The assessee has challenged the correctness of the reassessment proceedings on the ground that the ITO did not have any information prior to the issue of the notice under Section 148 of the Act, read with Section 147(6). It has been submitted that the ITO had issued a certificate under Section 197(3) of the Act, on 31-3-1976 and that, that certificate had never been revoked or amended, up to the date of the issue of notice under Section 148. In this certificate, the ITO had certified that according to the balance sheet of the company, as on 30-9-1974, the capital employed by the company for the purpose of Section 80J worked out to Rs. 67,97,147 and the deduction allowable under Section 80J at 6 per cent came to Rs. 4,07,828. It was further stated that the deduction would, however, be limited to the extent of profit from this new industrial undertaking, which was Rs. 3,88,166.

The ITO, therefore, certified that an amount of Rs. 3,88,166 could be exempt under Section 80K in the hands of the shareholders. Tax was to be deducted accordingly. The certificate was issued provisionally and could be revised later.

7. The learned counsel for the assessee has submitted before us that there was no information in the possession of the ITO for initiating the proceedings under Section 147(6) and the letter of the IAC, drawing the attention of the ITO to the assessment order in the case of the company, was not an information for the purposes of Section 147(6).

According to the learned counsel there was no nexus between the information and the ITO's reason to believe that the income had escaped assessment. It was further contended that a similar question had been declared by the AAC earlier and the decision was in favour of the assessee and no appeal had been filed against the order of the AAC. It was, therefore, contended that the ITO could not re-open the assessment, on this point, again. Reliance was placed on the decision of the Supreme Court in the case of CIT v. Rao Thakur Narayan Singh [1965] 56 ITR 234 where it was held that the ITO could not re-open the final decisions made against the revenue, in respect of questions that directly arose for decision in earlier proceedings.

8. On behalf of the department, it was submitted that the proceedings had been validly initiated under Section 147(6), as the ITO in consequence of information coming to him, after the completion of the original assessment, had reason to believe that the excessive relief had been allowed to the assessee in the original assessment. He pointed out that the information came in the form of a letter of the IAC who was in-charge of the company at that time and he had referred to the assessment in the hands of the company, which had been made much after the original assessment in the hands of the shareholders. He submitted that from this assessment order it was clear that the original understanding of the ITO that there was a profit in the new industrial undertaking, was wrong, and it clearly showed that the new industrial undertaking had suffered loss if all the allowances and rebates were taken into consideration. It was submitted by the departmental representative that the certificate which had been issued by the ITO in 1976 was a provisional certificate for deduction of tax at source and could not determine the question of exemption under Section 80K. for all times to come. He pointed out that the basic facts mentioned in the certificate changed after the assessment order was passed and the ITO when assessing the shareholders could take these facts into consideration for the re-opening of the assessment. He further contended that at the time of the ITO re-opening the proceedings, the Gujarat High Court had already held that under Section 80K relief could not be allowed where industrial undertaking has suffered a loss, if computed according to the Act. In this connection, he referred to the decision of the Gujarat High Court in the case of Ahmedabad Manufacturing & Calico Printing Co. Ltd. v. A.V. Joshi, ITO [1979] 118 ITR 544. It was, therefore, contended that the reopening of the proceedings was valid.

9. We have considered the facts of the case and we are of the view that the reopening of the proceedings has to 'be held as valid. The proceedings have been reopened under Section 147(6), on the basis of the information received from the IAC, who has drawn the attention of the ITO to the assessment order passed in the hands of the company which according to him disentitled the shareholders for deduction under Section 80K. The assessment order in the case of the company was passed almost three years after the original assessment in the hands of the shareholders and it is at the time of the assessment of the company that it has to be determined whether under Section 80J relief has to be allowed to the assessee, and, if so, to what extent. It is certainly a fresh information which has come to the ITO after the original assessment. We also find that the certificate which had earlier been issued by the ITO was on the basis that the industrial undertaking had earned a profit of Rs. 3,88,166. A perusal of the assessment order of the company would, however, show that the industrial undertaking in the form of the furnace division had resulted in a loss of Rs. 26,933, after deduction of depreciation and development rebate. It is also true that at that point of time the decision of the Gujarat High Court in Ahmedabad Manufacturing & Calico Printing Co. Ltd. (supra), had already been pronounced. The satisfaction under Section 147(6) that the income had escaped, has to be a prima facie satisfaction though it has to be bonafide. On the basis of the letter of the IAC and the assessment order in the hands of the company, pointing out to the loss in the industrial undertaking, the ITO could have reason to believe that at the time of the original assessment relief had been allowed to the assessee on wrong premises. At that point of time the ITO has not come to a final conclusion regarding the taxability, or otherwise, of the income in question. In our opinion, there was a nexus between the material before the ITO and his reason to believe that under Section 80K, relief was not allowable to the assessee. We also do not find any force in the submission of the learned counsel for the assessee that the ITO could not reopen this matter as the AAC had decided this issue earlier. The decision of the Supreme Court in Rao Thakur Naiayan Singh's case (supra) is not at all applicable here. Here, we are concerned with a fresh information coming to the ITO, after the original assessment, and the result of that information. We would, therefore, hold that the reassessment proceedings had been validly initiated.

10. Now we may come to the merits of the case. The case of the ITO is that, as the new industrial undertaking had suffered a loss, after allowance of depreciation and development rebate, there could be no question of allowing relief under Section 80J to the company. 6 per cent of the capital employed in the new industrial undertaking came to Rs. 4,07,828, but the furnace division had resulted in a loss of Rs. 26,933. The ITO was, therefore, of the view that no dividend could have been declared out of the profits of the new industrial undertaking when there were no profits. He was, therefore, of the view that the deduction under Section 80K could not be allowed to the assessee's shareholders.

11. The question for consideration before us is whether, for the purpose of granting deduction under Section 80K to the shareholders of the company, it is necessary that Section 80J relief should actually be allowed in the assessment of the company or, it would be enough to give a finding that deduction under Section 80J could be allowed if the new industrial undertaking fulfilled all the conditions laid down in Section 80J.12. Now this question came up for consideration before the Supreme Court in the case of Coromandel Fertilizers Ltd. (supra). In this case, the company was assessed as a new industrial undertaking and the assessment for the assessment year 1969-70 resulted in a carried forward of loss and unabsorbed depreciation. As no profit was made in the assessment year 1969-70, the ITO worked out, under Section 80J, relief available to the assessee and carried forward the deficiency under Section 80J(3) to the succeeding year. Similar was the position in the next year 1970-71 when the deficiency was carried forward to the next year. Like this there were losses and unabsorbed depreciation and after setting off of brought forward allowance, the company was not assessable to any income-tax up to the assessment year 1973-74.

However, on the basis of the book profits, the company declared a dividend for the year ending 1972. The company approached the ITO to give a certificate under Section 197(3), so that tax may not be deducted at source from the dividends payable to the shareholders. This request was rejected and on a writ being filed, the matter ultimately came before the Supreme Court. On behalf of the revenue, reliance was placed on an earlier decision of the Supreme Court in the case of CIT v. S.S. Sivan Filial [1970] 77 ITR 354. The Supreme Court noted the decision and found that the law had changed in substance and the provisions of Section 80J were materially different from the provisions of Section 15C of the Indian Income-tax Act, 1922 ('the 1922 Act'). The Supreme Court proceeded to consider the provisions of Section 80J particularly with reference to Sub-section (3) of that section, providing for the carried forward of the deficiency, where the new industrial undertaking had no profit or had less than sufficient profit. The Supreme Court further referred to the language of Section 80K particularly to the words of deduction from such income by way of dividends, of an amount equal to such part thereof, as is attributable to the profits and gains derived by the assessee-company from an industrial undertaking in respect of which the company is entitled to a deduction under Section 80J'. According to the Supreme Court, the important thing is that the company should be entitled to deduction under Section 80J and there was no legal requirement of a de facto deduction of the amount in question in a particular assessment year.

Necessarily, therefore, the dividend-earner will be entitled to invoke Section 80K and obtain the benefit of the provision. The Supreme Court rejected the plea of the revenue that it was necessary that the company should have an assessable income in a particular year. It was observed that the company, when it becomes entitled to deduction under Section 80J, gets it either in that year or by a set off in subsequent years.

The Supreme Court, therefore, observed that they were clearly of the opinion that Section 80K relief was available to the shareholders and so the tax was not to be deducted at source.

13. Similar matter came before the Madras High Court slightly earlier though the case was reported in 103 ITR. This was the case of South India Shipping Corporation Ltd. v. ITO [1976] 103 ITR 1. In this case it was held that from the assessment year 1968 69 onwards, the shareholders will be entitled to the benefit of Section 80K if the company was entitled to deduction under Section 80J, whether it actually got the deduction or not. It was further held that merely because the total income of a company is computed at a negative figure, it cannot be said that it does not include the profits and gains derived from an industrial undertaking. It was further held by the High Court that only because a company is found entitled to relief under Section 80J the deficiency is allowed to be carried forward and set off against the income of the subsequent years.

14. In view of the Supreme Court decision referred to above, the matter would have been beyond any doubt and dispute that, for the purpose of allowing relief under Section 80K to the shareholders, what was necessary was that the company should be entitled to relief under Section 80.T though, due to there being no profit from the industrial undertaking, the relief might not have been allowed in that year but might have been allowed to be carried forward for being deducted in later years. However, the matter was again considered by the Gujarat High Court in the case of Ahmedabad Manufacturing & Calico Printing Co.

Ltd. (supra). In this case, the company had approached the High Court for a writ to the ITO to issue certificate for not deducting tax in respect of the dividends to be paid, in so far as they related to the Sulzer plant of the company. The working of the Sulzer plant showed a business loss of Rs. 7,20,260 as computed under the Act. It was contended on behalf of the company that even if a new industrial undertaking had no profits or gains assessable to income-tax during the assessment year in question, the company was entitled to a deduction under Section 80J and, therefore, the ITO was bound to issue the certificate under Section 80K and the shareholders were entitled to relief under Section 80K. It was also contended that, in the light of the carried forward provisions of Section 80J(3), it is the allowability of the deduction and not the actual allowance of deduction under Section 80J(1) which was material for the purpose of relief to the new shareholders.

15. The Hon'ble High Court did not accept that plea of the assessee as according to them the words 'in respect of which the company is entitled to a deduction under Section 80J' occurring in Section 80K, go with the words 'as is attributable to the profits and gains derived by the company from an industrial undertaking'. The High Court further held that the profits and gains of the industrial undertaking, meant only such profits and gains which are assessable to income-tax and where there was no such profit, there is no part of the dividend actually received by the shareholders which can be said to be attributable to the profits and gains derived by the company from the new industrial undertaking. The High Court held that there being no profits from an industrial undertaking, no dividend was attributable to be exempt as profits (sic). According to their Lordships, what Section 80K. contemplates is the ascertainment of the particular proportion of the dividend received by the shareholders from the company, which proportion is attributable to the profits and gains derived by the company from the new industrial undertaking. The High Court doubted the decision in the case of Coromandel Fertilizers Ltd. (supra) and held that the provisions of Section 80K are not applicable when profits and gains derived by the company from an industrial undertaking are nil or showed loss. According to their Lordships if Section 80K relief is allowed in such cases, it would not be possible to point out the proposal to which the relief under Section 80K can relate, out of the total dividend declared by the company. Their Lordships, therefore, held that the benefit of Section 80K could not be granted in respect of the relevant amount of capital employed in the Sulzer plant during this previous year.

16. While the learned counsel for the assessee has relied on the decision of the Supreme Court and the Madras High Court, the departmental representative has relied on the decision of the Gujarat High Court and submitted that Section 80K would not be workable unless there is a profit in the new industrial undertaking out of which dividends could be declared by the company. Had there been no Supreme Court decision on the point, we would have proceeded to consider the different interpretations regarding Sections 80K and 80J to find out whether the relief under Section 80K could be available to the assessee. It is, however, clear from the order of the Supreme Court, referred to above, that the matter has been decided by their Lordships under no uncertain terms. That judgment was pronounced in December 1975 and in the course of more than six years there had been no occasion for revising the stand taken by the Supreme Court in that case. Once it is found that there is a decision of the Supreme Court on the matter, we need not enter into argument about the correctness of the view. It is true that the Gujarat High Court have expressed doubts in their decision and they, in fact, have given a decision, which is contrary to the earlier decision of the Supreme Court. However, it is not necessary for us to go into the Various aspects discussed by the Hon'ble High Court. In our view the matter stands concluded by the decision of the Supreme Court.

17. In this particular case, it may be mentioned that the assessee-company had sufficient book profits as well as the assessable profits. This is not a case where there is no gross total income of the company. At the same time it is true that the furnace division constituting the new industrial undertaking has shown loss, if the depreciation and development rebate regarding the division are allowed in computing the income of the new industrial undertaking. It is, therefore, a case where it has been found that the company has fulfilled all the conditions of Section 80J and is, therefore, entitled to relief under Section 80J for the purpose of actual deduction. The relief has to be allowed from the profits and gains of industrial undertaking. In this case as there was no profits of the undertaking the relief under Section 80J, which the company was entitled to, was carried forward to be allowed against the profits of the industrial undertaking in the succeeding years. This process could go on for a period of eight years. As held by the Supreme Court, when the company becomes entitled to deduction under Section 80J(1) it gets it either in that year or in subsequent years. In a stray case, it is quite possible that deduction under Section 80J is not actually allowed to a company in any of the five years during which the company is entitled for such relief. It is also possible that the company does not, ultimately, get the benefit of the carried forward losses if there are no profits in the industrial undertaking up to the period of eight years. On the basis of the decision of the Supreme Court in the case of Coromandel Fertilizers Ltd. (supra) the benefit to the shareholders would be allowable as it is found that the company is entitled to deduction under Section 80J. As far as the finding out of the part of the profits, which is attributable to the profits and gains derived by the company from any industrial undertaking is concerned, we will have to refer to Rule 20 of the Income-tax Rules, 1962 and on application of that rule, the proportion can be ascertained.

18. In view of the above discussion, we are of the view that the AAC was right in holding that the deduction under Section 80K is allowable in the case of the assessee. In the result, both the departmental appeal and the cross objection by the assessee are dismissed.


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