JUDGMENT
Aloke Chakrabarti, J.
1. This is an appeal filed by the assessee under Section 260A of the Income-tax Act, 1961, against the judgment of the Appellate Tribunal in respect of its assessment for the assessment year 1997-98.
2. The assessee carried on business of manufacture and sale of alloy, free cuttings and special sheets, black and bright bars, electrical stampings, laminations, strip wound cores, bolts and nuts, rivets and spikes for special purpose machinery, etc. The assessee also exports the goods manufactured by it.
3. In respect of exports made by the assessee, it is granted benefit by way of duty free imports. Prior to the previous year ending March 31, 1997, the assessee qualified for the said benefits by way of duty free imports. As and when it accrued to the assessee, the same was shown in its accounts. Based on the quantum of exports made during the previous year ending on March 31, 1997, the assessee, in its accounts for the said previous year, passed a book entry debiting export benefit receivable account and crediting miscellaneous income account for the amount of customs duty benefits of Rs. 228.34 lakhs which would have accrued to the assessee on the import of the materials. The profit and loss account showed a better picture due to taking into consideration of the said sum of Rs. 228.34 lakhs. In its return of income for the assessment year 1997-98, the assessee deducted the said notional income of Rs. 228.34 lakhs from the profit as per the profit and loss account in order to arrive at the correct figure of taxable income.
4. The Assessing Officer in the intimation dated August 4,1998, under Section 143(1)(a) of the Act did not allow the assessee’s claim for deduction of the said sum of Rs. 228.34 lakhs.
5. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) which was ultimately dismissed. Challenging the said appellate order, the assessee preferred a further appeal before the Appellate Tribunal which was also dismissed. Hence, the present appeal was filed by the assessee.
6. Heard Mr. J. P. Khaitan, learned counsel for the appellant-assessee. The first contention of the appellant is that the Assessing Officer could not refuse deduction in respect of the said sum of Rs. 228.34 lakhs towards notional income under Section 143(1)(a) of the Act and in case he was not accepting the same, he was required to proceed under Section 143(3) after issuing notice under Section 143(2) for granting opportunity to the assessee to explain the situation. It is contended by learned counsel that the said amount for which the deduction was asked for was not an actual income but was a notional income only as neither import was made using the said duty-free import licence nor the same was sold resulting in actual income of the assessee. The entries in the profit and loss account were made on the notional income based on the quantum of import made during the previous year concerned and appropriate note was furnished indicating the said fact. In the return of income for the concerned year, the notional income was shown under a separate heading on a probable future sale of import entitlement licence and, therefore, there were no reason for not allowing the deduction to the assessee concerned in respect of the said amount of notional income. The argument on behalf of the assessee is that the tax can be imposed only on actual income but not on notional income. It is not a case of accounting on mercantile basis on accrual of income. Reliance was placed on the judgment in the case of Sutlej Cotton Mills Ltd. v. CIT ; Khatau Junkar Ltd. v. K.S. Pathania [1992] 196 ITR 55 (Bom); Bank of America N.T. and S.A. v. Deputy CIT [1993] 200 ITR 739 (Bom) and Modern Fibotex India Ltd. v. Deputy CIT .
7. On behalf of the respondent, a written argument has been filed contending, inter alia, that the law having undergone a change an appeal having been provided against an intimation under Section 143(1)(a) with effect from June 1, 1994, under Section 246(1)(a), the contention of the appellant that an order under Section 143(1)(a) is final and therefore, has to be construed strictly, does not stand any further. With regard to the contention of the appellant that the notional income was shown in a separate heading only to give a rosy picture, it has been stated that the materials available at the ‘relevant point of time were that the profit had been accounted for in the books of account and credited in the profit and loss account on accrual basis and, therefore, the action of the authorities cannot be challenged on that ground. As regards the contention of the appellant that debatable issues cannot form the basis of assessment under Section 143(1)(a) would not be controversial per se and if the income or loss shown in the return are compulsorily to be acceptable, the proviso to Section 143(1)(a) would be rendered nugatory.
8. Considering the aforesaid contentions of the parties, it appears that the sum of Rs. 228.34 lakhs was not actual receipt but was a notional income allegedly shown by the appellant to give a rosy picture about the condition of the company. It appears to us that the return was filed for the concerned year by the assessee after deducting the said notional income of Rs. 228.34 lakhs from the profit as per the profit and loss account. The respondents have proceeded on the basis that the said account depicts the accrual of income and therefore, differing with the contentions of the appellant assessment was made under Section 143(1)(a) treating the same as an accrued income. In this respect, we find that the scope of Section 143(1)(a), as was prevailing at the relevant point of time, permitted the Assessing Officer without requiring the presence of the assessee or production by him of any evidence in support of the return, to make an assessment of the total income or loss after making such adjustments to the income or loss declared in the return as are required to be made under clause (b) of the said sub-section. Upon considering the scope of Section 143(1)(a), we are of the opinion that when the Assessing Officer proposes to differ with the disclosure made in the return, an opportunity of hearing to the assessee is required and therefore, such matter can be gone into under Section 143(3) serving notice under Section 143(2) and not under Section 143(1) (a).
9. Therefore, the judgment and order impugned herein is hereby set aside. But we make it clear that the authorities will be entitled to complete the proceedings under Section 143(3) after serving requisite notice and in accordance with law. The appeal is allowed as aforesaid.
Sadhan Kumar Gupta, J.
10. I agree.