ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is an appeal filed by the assessee against the order of the Commissioner of Income-tax (Appeals), Visakhapatnam dated 16-12-1991, partly allowing the appeal and reducing the amount on which additional tax under Section 143(1A) is to be computed from Rs. 48,85,920 to Rs. 45,94,830.
2. The facts leading to the appeal may be stated as follows: For the assessment year 1989-90, the total income of the assessee according to its books of account is Rs. 48,16,112. The assessee-company claimed that for purpose of computation of its profits under the provisions of the Income-tax Act, the losses to be carried forward according to its own estimate stood at Rs. 50,72,382 and they have to be deducted from out of book profits and if this loss was to be deducted the company will have no taxable income. This is one of the years in which the provisions of Section 115J were in force. In accordance with the provisions of the said section if there are book profits but not assessable profits, the assessee should pay taxes on notional income calculated at 30% of the book profits. In pursuance of the provisions of Section 115J, the assessee had returned a sum of Rs. 2,91,090 as its income under Section 115J. We are not now concerned with the computation of profits under Section 115J and the controversy is only in respect of calculation of profits under the provisions of Income-tax Act (other than 115J).
3. According to the assessee, the loss for the year as per Income-tax Act
is as under :
Income before deduction of carry forward
losses Rs. 48,16,112
Less : Past Year's losses to be set off Rs. 50,72,382
Loss for the year Rs. 2,56,270
Since there was loss incurred, 30% of the book profits under Section 115J was declared at Rs. 2,91,090. The assessee filed its return on 28-12-1989, declaring an income of Rs. 2,91,090 under Section 115J and also disclosing loss of Rs. 2,56;270 according to the business results of the accounting year in question. An intimation was sent by the Assessing Officer under Section 143(1)(a) dated 28-2-1990 computing the income of the assessee at Rs. 48,85,918. The details of his computation are as follows :
Income before deduction of carry-forward loss Rs. 48,16,112
Add back: Cash incentives for the year 69,806
Rs. 48,85,918
Additional tax levied on Rs. 69,806 8,062
Thus the Assessing Officer had levied additional tax of Rs. 8,062 in respect of adjustment made in the form of addition of cash incentives of Rs. 69,806 received by the assessee during the year. Subsequently the Assessing Officer completed the assessment under Section 143(3) of the Income-tax Act, by his order dated 30-4-1990 in which he determined the income of the assessee at Rs. 48,85,920 which was the same figure determined by him for purpose of intimation under Section 143(1)(a) and even in the regular assessment order, the additional tax levied was shown at Rs. 8,062. Thereafter, the assessee filed two petitions under Section 154 dated 26-3-1990 and 5-7-1990 respectively. So also the Income-tax Officer issued notices under Section 154 thrice, i.e., on 26-7-1990,28-9-1990 and 2-5-1991 respectively. Eventually, only one single rectificatory order styled as order under Section 154 dated 25-9-1991 was passed with reference to the two petitions filed by the assessee and also with reference to the three notices issued by the Income-tax Officer mentioned above. In those orders passed under Section 154 dated 25-9-1991, he levied additional tax of Rs. 5,81,861 the working of which was shown as under :
Past year's losses not allowable Rs. 50,72,383
Cash incentive for the year treated as income Rs. 69,806
Rs. 51,42,189
Additional tax leviable on Rs. 51,42,188 5,93,923
Less : Additional tax levied in the intimation 8,062
Additional tax levied under Section 154 5,85,861
4. Against levy of additional tax under Section 154 amounting to Rs. 5,85,861, an appeal was filed before the learned Commissioner of Income-tax (Appeals), Visakhapatnam, who by his impugned orders uphold the levy of additional tax but modified the quantum to Rs. 5,30,702. Being aggrieved, the assessee-appellant filed the present appeal challenging the correctness of the order passed under Section 154 levying additional tax of Rs. 5,30,702. It was submitted for the assessee-company that it had been receiving incentive bonus from the Government for carrying on the business of exports in some of its products. The sum received represent the following nature of items :
(i) Cash compensatory support
(ii) Excise Duty rebate
(iii) Duty drawback
(iv) Sale proceeds for REPs
Right from 1983-84 it has been the contention of the assessee during the income-tax assessment completed against it that the nature of the above-named incentive received by it represent only capital receipts and not revenue receipts and as such they cannot be included as part of its income. In support of this contention, the assessee has been relying upon the decision of the Special Bench of the Tribunal in Gedore Tools (India) (P.) Ltd. v. LAC [1988] 25 ITD 193 (Delhi) where the question involved was whether cash compensatory support received from the Government was taxable as revenue receipt and whether duty draw back received by an exporter is taxable and also whether import entitlement is taxable. Ultimately the Larger Bench of the Appellate Tribunal held that they are capital receipts which cannot be considered as revenue receipts and hence not taxable. The Revenue, however, had not accepted the decision of the larger Bench of the Tribunal in Gedore Tools (India) (P.) Ltd.’s case [supra) and on the ground that it had taken the matter in reference to the High Court and that the reference is still pending, the Assessing Officer did not accept the plea of the assessee while framing the assessments for 1984-85 to 1988-89. However, the fact remains that the assessee has been making the claim and that the Assessing Officer in the assessments framed against the assessee has been consistently negative the claim of the assessee. The assessee had filed the return for assessment year 1989-90 and the claim of the assessee was that cash compensatory support, excise duty rebate, duty drawback and sale proceeds of REPs received by the assessee cannot be taxed in the hands of the assessee but held to be capital receipts and therefore, non-taxable. This contention of the assessee was pending in the appeals for the assessment years 1984-85 to 1988-89. The total of these amounts right from assessment years 1984-85 to 1988-89 came to Rs. 50,72,382 as can be seen from the particulars given in the table given below :
Asst. Year Income /loss of Brought forward loss Total loss
the year from earlier years carry forward
Rs. Rs. Rs.
1984-85 4,14,630 (loss) - 4,14,630
1985-86 21,69,205 (loss) 4,14,630 25,83,835
1986-87 84,00,717 (loss) 25,83,835 1,09,84,652
1987-88 2,88,494 (income) 1,13,99,176* 1,11,10,682
1988-89 60,38,300 (income) 1,11,10,682 50,72,382
* Loss brought forward is shown in excess by mistake Rs. 4,14,630.
By the date of filing the return for assessment year 1989-90, it remained the contention of the assessee that these items did not constitute the income and its income for the past years will have to be recalculated ignoring these items as income. As a result of the Income-tax Officer completing the assessments of past years treating the above items as income, the loss to be carried forward stood completely wiped out. As already stated, the assessments were not accepted and the assessee filed appeals against the inclusion of these items as income and they were pending at the time of filing the return for assessment year 1989-90. Consistent with its stand, in the income-tax return filed for assessment year 1989-90, the assessee claimed set off of loss of Rs. 50.72 lakhs to which it is entitled if the claim made by the assessee is accepted by the appellate authorities in the course of appeals. However, the Legislature thought it fit that in order to set at rest any possible controversy about the taxable nature of these receipts it had amended Section 28 and inserted Clauses (iia), (iiib) and (iiic). They were inserted in Section 28 by Finance Act, 1990 with retrospective effect. Under Clause (iiia) REPs were made liable to tax with retrospective effect from 1-4-1962. Under Clause (iiib) each compensatory assistance (CCS) is made liable to tax with retrospective effect from 1-4-1967 and under Clause (iiic) duty rebates and duty drawbacks were made liable to tax with retrospective effect from 1 -4-1972. The Finance Bill, 1990 was introduced in the Lok Sabha on 19th March, 1990. Before its introduction, the assessee-company never contemplated that these items will be subjected to tax with retrospective effect. The income-tax return for assessment year 1989-90 was filed on 29-12-1989 which was two months before the Finance Bill, 1990 was introduced. It was the contention of the assessee that by the date it had filed the income-tax return it had every justification to presume that the claim made by it before the assessing authority that the inclusion of these items should not be considered as income and the said contention would also be upheld ultimately and as a result it would be entitled to the loss of Rs. 50.72 lakhs and it is entitled to set off of that loss against income of the current year. The initial intimation dated 28-2-1990 was received some time after that date and in the said intimation past years’ losses claimed by the assessee of Rs. 50.72 lakhs were not considered and the CCS for the current year was added back. After the Government brought retrospective amendment to Section 28 the basis on which the past years’ losses were claimed simply vanished. It is urged on behalf of the assessee that the assessee acted bona fide and in conformity with the law then prevailing while making the claim for carry forward of losses of Rs. 50.72 lakhs.
5. It is contended by the learned counsel for the assessee that the return of income is always filed based on the claim of the assessee. It is up to the Income-tax Officer to accept or reject the claim in accordance with law. There is no restriction placed by the Act on any assessee that if the claim is not likely to be allowed by the Assessing Officer, such claim should not be made in the return of income. On the contrary, a return is filed based on the assessee’s understanding of the factual and legal position and not on the basis of likely understanding of the Assessing Officer. If the statute itself forbade for making any claim the position would have been different. If any claim is made contrary to the express language used in the stature then prima facie adjustment falling under Clause (iii) to the proviso to Section 143(1)(a) could be made since apparently no discussion or debate is permissible. Section 72 is the section under which carry forward of losses is permissible. Section 72(1) requires that the same business should be carried on before loss is allowed to be set off. If there is any change in business activity or the business is stopped, the loss cannot be carried forward. So also the loss cannot be carried forward beyond the period of seven years succeeding the assessment year in which the loss is sustained. So also set off of loss is allowed only out of profits and gains of business and not from any other sources. If there is any violation of provisions of Section 72, then also the Income-tax Officer had power not to set off previous year’s losses from the current year’s profits and that he has also all the powers to make such prima facie adjustment to bring the claim in conformity with the provisions of Section 72(1) of the Income-tax Act. Calculation of loss in the assessment was not made a pre-condition under the Income-tax Act to allow set off of loss under law. It is also nowhere stated in the Income-tax Act that if the loss is not accepted in the assessment, the assessee shall not claim set off of any such loss in the return filed against the profits of the subsequent years. The accepted position under law is that the return of income is expected to contain income or loss of the assessee as understood by him with reference to the statutory provisions and not what the Assessing Officer will understand with reference to the provisions of the statute. The assessee cannot be penalised for any claim having been made by him in his return unless it is proved that the claim is made fraudulently or deliberately with an intention to evade payment of tax. If the Assessing Officer correctly appreciated the assessee’s plea it would then follow that the additions made by him of several items as income will be incorrect and the loss claimed by the assessee would have been available to it. The assessee is not bound by the assessment order and had always a right of appeal. If he exercised this right and prevented the assessment from becoming final it cannot be said that the assessee is forbidden from making the claim in the return of subsequent years though it may not be consistent with the assessments already made by the Assessing Officer.
6. If there is direct violation of the provisions of Section 72 then adjustment relating to the loss can be made by the Income-tax Officer but where the provision of the statute are silent or where the matter depends on interpretation of various provisions could it be said that in respect of such items, the power to make prima facie adjustment vests with the Assessing Officer in terms of Clause (iii) under first proviso to Section 143(1)(a) of the Income-tax Act. Out of the two possible views of interpretation, the preferable view would be that since the return essentially represents the claim of the assessee or what his income is, it is open to the assessee to make the claim consistent with the stand taken by him in the past years. The statute does not, in the humble opinion of the assessee forbid his right to claim set off of loss if quantification is pending consideration in appeal proceedings. It is next contended that appeal is only a continuation of assessment proceedings. In this connection the attention of the Tribunal is drawn to the Calcutta High Court’s decision in CIT v. Bengal Card Board Industries & Printers (P.) Ltd. [1989] 176 ITR 193. The Honble Calcutta High Court held in last para at page 197 that an appeal is in continuation of original proceedings. So also the attention of the Tribunal is invited to the decision of the Allahabad High Court in J.K. Synthetics Ltd. v. O.S. Bajpai, ITO [1976] 105 ITR 864 in which, inter alia, it was held as follows at page 881:
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 Prasad v. Diana Engineering Co. and the Oudh Chief Court in Girija Dot Singh v. Gangotri Dot Singh.
Following the above two decisions it should be concluded that where the assessment is completed denying the loss and an appeal is pending, the process of adjudication and quantification of loss is sill continuing. Assessment made already having been appealed against, the finality of that assessment is destroyed at least in respect of the points appealed against. It cannot, therefore, be said that the assessee had lost the right to claim set off against profits because of the completion of assessment denying losses. It would follow that the assessment to the extent appealed against ceased to exist and the entire issue is still open. This would invariably lead to the situation whether the assessee’s claim of past years’ losses is still kept alike and it is open to claim set off of past years’ losses against subsequent year’s income in the return filed by it. Section 74(2) of the Income-tax Act provides for the right of an assessee to carry forward the loss for a specified number of years. Our attention is drawn to the decision of the Bombay High Court in All India Groundnut Syndicate Ltd. v. CIT [1954] 25 ITR 90. At page 100, the following is what is stated :
The duty is that he has to compute the loss and notify the loss to the assessee. This sub-section was clearly enacted in order to crystallise the loss in any particular year of assessment, to leave no dispute with regard to that loss and to give notice to the assessee of the amount at which the loss was computed by the Income-tax Officer. But the right which the Legislature confers upon the assessee does not arise under this sub-section, but arises under Sub-section (2) and that right is to carry forward the loss of the previous years for a period of six years and that right is an absolute unqualified right and that right is not made conditional upon any computation made by the ITO or any notice issued by the ITO.
The above decision would make it clear that it is an absolute and unqualified statutory right of the assessee to claim carry forward and set off of losses and it is not in no way conditional upon quantification of intimation thereof. Even if there is such intimation and the assessee had filed an appeal against such quantification or intimation of loss, the assessee is entitled to claim carry forward and set off of losses in his subsequent year’s return in accordance with the claim which is pending adjudication. It was also contended for the assessee that it would be essential to decide whether the losses in any year can be carried forward to the following year and set off as claimed by the assessee is a matter which is to be determined by the Income-tax Officer who deals with the assessment of the subsequent year. A decision recorded by the Income-tax Officer in the earlier years is not binding on an assessee and in this connection the Hon’ble Supreme Court’s decision in CIT v. Man Mohan Das [1966] 59 ITR 699 was cited and at page 700 in a portion of the head note the following is what is found :
Whether the loss in any year may be carried forward to the following year and set off against the profits and gains of the subsequent year under Section 24(2) has to be determined by the ITO who deals with the assessment of the subsequent year. A decision recorded by the Income-tax Officer who computes the loss in the previous year that the loss cannot be set off against the income of the subsequent years is not binding on the assessee.
Therefore, the authorities cited by the assessee would make it clear that the assessee asked for set off on the basis of claims already made. Of course the claim should be bona fide, reasonable and should not be a frivolous claim devoid of any basis. As already explained the assessee was entitled to quantification of loss in view of the judgment of Special Bench of the Tribunal in Gedore Tools (India) (P.) Ltd. ‘s case (supra). It was a pure stroke of misfortune that the law was amended retrospectively altering the legal position already existing. Although the assessee had claimed these losses it is always subject to proper quantification after completion of assessment or appeals, as the case may be. It is one thing to say that the assessee has no right to set off of such losses and altogether different to state that notwithstanding the claim in the return it is open to the Assessing Officer in the course of assessment enquiry to determine the correct amount of the loss after hearing the assessee. In the present case, the income is quantified in the intimation by making prima facie adjustment unilaterally without hearing the assessee. Merely because in the assessments of past years quantification of loss has not been done it cannot lead to the conclusion that the claim of the assessee is wrong warranting any adjustments by way of disallowance of such losses under Clause (iii) to the first proviso Section 143(1)(a) of the Income-tax Act. The adjustments made cannot be called prima facie adjustments.
7. What is prima-facie adjustment? It is submitted that it is to be treated as synonymous with mistake apparent from records. It is further submitted that where the matter is debatable it ceases to be a mistake apparent from records. Adjustments to be made while issuing intimation under Section 143(1) (a) are identical to the rectification of mistake under Section 154 of the Income-tax Act. The Bombay High Court’s decision in Khatau Junkar Ltd. v. K.S. Pathania [1992] 196 ITR 55 which explains the scope and power of an Assessing Officer to make adjustments is cited before us. In the last para at page 68 of the reported decision, the following is what is stated :
In fact, the wording of this provision itself makes this very clear. Under Clause (ii) of the proviso to Section 143(1)(a), any loss carried forward, deduction, allowance or relief has to be allowed on the basis of the information available in such return or accounts or documents accompanying it. Similarly under Clause (iii) of the proviso, to disallow any deduction, allowance or relief claimed, such deduction, allowance or relief must be such as is on the basis of the information available in the return, accounts or documents, prima-facie, inadmissible. The Income-tax Officer, therefore, has no power to go beyond or behind the return, accounts or documents, either in allowing or in disallowing any such deduction, allowance or relief.
Under Clause (iii) to the proviso, unless the return or the accompanying documents or accounts shows that the deduction claimed is prima-facie inadmissible, such deduction cannot be disallowed at the intimation stage. If the Income-tax Officer is not satisfied with the claim for deduction, or if he requires any further information or any further evidence in that connection, he is bound to follow the procedure prescribed under Section 143(2) of giving a notice to the assessee. It is not open to him to disallow such a claim under Section 143(1)(a).
It is contended that the present adjustments, viz., disallowance of loss clearly falls beyond the powers of the Assessing Officer in terms of the ratio laid down in the above judgment. Next our attention is drawn to the departmental Circular No. 549 dated 31-10-1989 found reported in 182 ITR (Statutes) at page 20 where the scope of amendment brought about in Section 143 by the Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989 was explained. In para 5.3 the adjustments to be made to the income/loss declared in the return was explained as under :
5.3 Adjustments be made to the income or loss declared in the return. -A proviso to Clause (a) of Sub-section (1) of the New section enables the Department to make the following adjustments to the returned income or loss for the purposes of computing the tax or interest payable by or refundable to the assessee:
(i) rectification of any arithmetical errors in the return or in the accompanying accounts or documents;
(ii) allowance or disallowance of any loss carried forward, deduction, allowance or reliefs which, on the basis of information available in such return or the accompanying accounts or documents, is prima facie admissible or inadmissible, as the case may be.
Again at para 5.4, the prima-facie adjustment as contemplated under Sub-Clause (ii) in para 5.3 is elaborated as follows :
5.4 The prima-facie adjustments mentioned at (ii) above can be made only on the basis of information available in the return or the accompanying accounts or documents and not on the basis of the past records of the assessee. Some examples of such prima foci a disables or inadmissible in respect of which adjustments can be made to the returned income or loss are:
** ** ** (iii) While computing income under the head 'Profits and gains of business or profession' depreciation claimed at rates lower or higher than those provided for in the Income-tax Rules. (iv) ** ** ** (v) Carried forward speculation loss set off against income from business or profession or against income under any other head. (vi) Loss under any head, other than under the head 'Profits and gains of business or profession', carried forward and set off against the current income. (vii) Carried forward loss of business set off against the income of the current year under other heads. (viii) Old loss of more than eight assessment years set off against the current business income, if the information is available in the return, of the accompanying documents. ** ** ** It may be mentioned that the above is not an exhustive, but only an illustrative, list of prima facie admissibles or inadmissible for which adjustments can be made to the returned income or loss.
Our attention also is drawn to some Tribunal decisions on the question as to what constitute prima-facie adjustments. Our attention is drawn to the decision of the Madras Bench in Amber Electrical Conductors (P.) Ltd. v. Dy. CIT [ 1992] 43 ITD 313 in which it was held that where a particular matter requires an enquiry for coming to a decision, the said adjustment cannot be termed as a prima-facie adjustment. Hence, in the first place before the adjustment is made the Assessing Officer should make conscious exercise of finding out whether an enquiry is necessary. Next our attention is also drawn to the decision of the Jaipur Bench in Badhar Khan v. Dy. C/T[1992] 42 ITD 589 in which it is stated that where there is a substantial point of dispute it ceases to be a prima-facie adjustment. Next the decision of the Indore Bench in Eicher Motors Ltd. v. Dy. CIT[ 1992] 40 ITD 595 is cited. In that decision it is stated that if the allow ability or disallow ability of any claim is debatable no adjustment in respect thereof could be made. It was also held that the Assessing Officer should be satisfied that the adjustment is ex facie justified. To sum up, the contention of the assessee is as follows:
(a) the assessee is entitled to set off of losses in the subsequent years’ returns so long as the claim that such losses have been incurred is pending adjudication in some proceeding;
(b) at any rate the correctness of legal position whether the losses as claimed would be allowed is certainly debatable and cannot be arrived at without going through the process of harmonising the provisions of the Act and applying the decided authorities to the same;
(c) disallowance of loss in the intimation warrants an enquiry;
(d) the matter is highly debatable.
It is contended that the permissible prima facie adjustments are totally absent in this case and the Assessing Officer was clearly in error in making the above adjustments and demanding additional tax thereon in the intimation.
8. It is contended that after the completion of assessment under Section 143(3), the levy of additional tax under Section 143(1 A) is not permissible under law. The following facts are essential to be noted before appreciating the contention :
(a) The Income-tax return was filed on 28-12-1989 declaring an income of Rs. 2,91,090.
(b) Intimation under Section 143(1)(a) dated 28-2-1990 – the income assessed Rs. 48,85,918.
(c) Assessment under Section 143(3) made on 30-4-1990 – income assessed Rs. 48,85,920.
(d) Order under Section 154 dated 25-9-1991 rectifying the intimation and levying additional tax of Rs. 5,85,816.
The prime contention of the assessee is that the initial intimation dated 28-2-1990 subsequently merged itself into the assessment order under Section 143(3) dated 30-4-1990. Therefore, the statutory provisions do not empower the Assessing Officer to rectify the intimation after assessment for under general law based on the doctrine of merger once an assessment is made intimation ceases to exist and no further action can be taken on the basis of intimation. Clause (a) to Section (1) of Section 143 of the Income-tax Act enables the Assessing Officer to send intimation making prima-facie adjustment. Clause (b) empowers the Assessing Officer to send intimation even after completion of assessment.
Sub-section (1A) enables Assessing Officer to levy additional tax. Clause (b) of Sub-section (1) of Section 143 as far it is relevant for our purpose reads as follows :
(b) Where as a result of an order made under Sub-section (3) of this section ... there is any variation to the carry forward loss, deduction, allowance or relief claimed in the return, and as a result of which (i) if any tax or interest is found due an intimation shall be sent to the assessee specifying the sum so payable and such intimation shall be deemed to be a notice of demand issued under Section 156 and all the provisions of this Act shall apply accordingly; and ** ** ** Clause (b) of Sub-section (1A) is also relevant and as far as it is relevant for our purpose reads as follows : (1A) Where as a result of the adjustments made under the first proviso to Clause (a) of Sub-section (1) (i) the income declared by any person in the return is increased; or (ii) the loss declared by such person in the return is reduced or is converted into income, the Assessing Officer shall, (A) ** ** **
(B) is a case where the loss so declared is reduced under Sub-Clause (ii) of this clause or the aforesaid adjustments have the effect of converting that loss into income, calculate a sum (hereinafter referred to as additional income-tax) equal to twenty per cent of the tax that would have been chargeable on the amount of the adjustments as if it had been the total income of such person and specify the additional income-tax so calculated in the intimation to be sent under Sub-Clause (i) of Clause (a) of Sub-section (1);
With the help of the above two relevant provisions, we will have to see how far the Assessing Officer had the right to rectify the original intimation after the completion of the assessment. Applying the above provisions to the facts before us in the intimation initially sent on 28-2-1990, the income computed was Rs. 48,85,980. In the assessment made on 30-4-1990 under Section 143(3) of the Income-tax Act, the income assessed remained at the same figure of Rs. 48,85,920. Thus there is no variation between the income as assessed and the income as shown in the intimation. Both Clause (b) to Section 143(1) and Clause (B) to Section 143(1A) speak of income assessed at higher figure in comparison to intimation already sent. If the income shown in the intimation as assessed is one and the same Clause (b) to Sub-section (1) of Section 143 and Clause (B) to Sub-section (1A) of Section 143 does not apply at all. There is no change in relation to the assessment of income brought about by the order under Section 143(3) and it remained at the same figure as shown in the intimation. Further Clause (b) of Sub-section (1) merely stated that the Assessing Officer may send an intimation even after completion of assessment to the extent of variation. The question of rectifying the original intimation is not contemplated at all by Clause (b). Clause (b) of Section 143(1) speaks of an intimation. It covers a situation where there is no intimation and the assessment is made for the first time and without going through the process of sending any intimation. Clause (b) of Sub-section (1) does not postulate sending a revised intimation. It only speaks of intimation and not fresh intimation. Since intimation was already sent earlier before completion of assessment under Section 143(3) application of Clause (b) of subsection (1) does not arise for consideration.
9. Coming to Clause (B) to Sub-section (1A) of Section 143 it is stated that the said clause is applicable only where as a result of an order under Section 143(3) additional tax payable has been increased or reduced in comparison to the income determined in the earlier intimation. Since in the present case the income both in the intimation and the assessment order is one and the same, the provisions of Section 143(1A) Clause (B) are not attracted. It is argued that in the whole provision of Section 143 there is no provision to rectify the original intimation after completion of assessment. However, in this case the Assessing Officer had rectified the original intimation even after completion of assessment, a power which does not exist in him under the provisions of the Act. Once a regular assessment is made intimation ceases to have any validity and gets merged with the order of assessment. Since the provisions of the Act do not empower the Assessing Officer he is forbidden from passing any order under Section 154 and in the present case, there is no legal sanction in his order dated 25-9-1991 and it deserves to be annulled.
10. Levy of additional tax is intended to act as a deterrent in lieu of penalty for making patently wrong claims. It has dual purpose to serve. It is recompense for belated payments of tax and it also acts as a deterrent from making wrong claims in the return of income.
11. There was no negligence on the part of the assessee and no effort was involved in detecting any mistake allegedly committed by him. The assessee made a claim for set off of past losses consistent with its contentions in the appeals for the earlier years which were still pending. Therefore, even in terms of the circular no additional tax could be charged. Irrespective of the claim made, the assessee took care to pay the taxes to cover the contingency of the claim of the loss eventually not being accepted for some reason or the other. The assessee took care to pay all the taxes and according to the returned income, the total refundable calculated on the admitted income worked out to Rs. 26,53,515. At page No. 6 of the return a note was given that in computing the tax, even the sum of Rs. 69,809 which is the CCS for the year is also included notwithstanding the fact that the assessee was claiming that this item does not partake the character of income. In addition to the advance tax of Rs. 21,02,000 and TDS of Rs. 5,81,686 the assessee paid a sum of Rs. 1,37,930 on self-assessment as on 28-12-1989 to cover the taxes due on the sums of Rs. 50,72,382 (being past losses) and Rs. 69,809 being the current year’s CCS. Therefore, it is clear that though the assessee claimed set*off of past losses and claimed that he is not liable to tax on CCS in conformity with its claim in the earlier years, the assessee had paid taxes in full even in respect of the disputed item.
12. Where additional tax is sought to be levied it would be necessary to look to the entirety of the situation and not to close the eyes to the prevailing facts and treat as if the levy of additional tax is automatic. There is nothing wrong in law for the assessee paying the tax and still making a claim. Making of a claim supported by cogent reasoning cannot give rise to prtma facie adjustment in an intimation issued under Section 143(1)(a) of the Income-tax Act. The provisions of Section 143(1)(a) which enables making a prima facie adjustment cannot be converted into a tool of oppression of a taxpayer. The provisions of Taxing Statute if not construed liberally impose unreasonable and unintended burden on the taxpayer. The Court/ Tribunal went to the extent of construing word s in a statute even by making some violation to the language used. The decision of the Hon’ble Supreme Court in K.P. Varghese v. ITO (1981] 131 ITR 597 and another decision of the Hon’ble Supreme Court in State of Tamil Nadu v. Kodaikanal Motor Union (P.) Ltd. [1986] 62 STC 272 were cited as authorities in support of the said proposition. The above two authorities give power to interpret the law based upon the purpose for which the provision is inserted in the statute. Rectificatory order passed under Section 154 dated 25-9-1991 is not tenable and cannot be sustained in law. Once there is controversy on the scope of the adjustment such adjustment cannot be admitted at all as it ceases to be prima facie adjustment and consequently levy of additional tax in respect of such adjustment will not arise for consideration.
13. As against these contentions, the Departmental Representative also filed written submissions which are made part of the record. In listing out the reason for passing the rectificatory order under Section 154 dated 25-9-1991, firstly it was stated that instead of taking the returned income at the time of intimation under Section 143(1)(a), the Assessing Officer took it at Rs. 48,16,172 instead of taking the loss at Rs. 2,56,270. This is a mistake quite apparent from records. The second reason is that consequent on completing the assessment under Section 143(3) on 30-4-1990, the Assessing Officer came to know that the assessee was not having determined losses that could be carried forward whereas the assessee in his return claimed carry forward losses of Rs. 50,72,382. Basing on the provisions contained in Section 143(1A)(b) the Assessing Officer sought to rectify intimation under Section 143(1)(a). While rectifying he has rectified both the mistakes and enhanced the additional tax to Rs. 5,93,923.
14. Replying to the assessee’s contentions, the learned Departmental Representative submitted as follows: With regard to the assessee’s contention that it is justified in claiming deduction of carried forward losses of Rs. 50,72,382 and the assessee’s reliance on the decision of the Bombay High Court in the case of All India Groundnut Syndicate Ltd. (supra), it is submitted that it is not correct. Kind attention is invited in this regard to the Commentary of Chaturvedi and Pithisaria, Vol. III, Page 3825, Fourth Edition under the heading ‘Determination and intimation of loss’. Under the said heading the learned authors had stated the following :
Determination and intimation of loss.Unless the loss claimed by an assessee for.. any year is proved and quantified there can be no question of carrying it forward for, a set off against future profits (B.B. Iraneev. CIT [1963] 50 ITR 366 (Bom.), affirmed, [1966] 60 ITR 437 (SC). Where the Assessing Officer (up to 31 -3-1988, Income-tax Officer) does not notify to the assessee by an order in writing, as provided for in Section 157, the amount of loss for any year as quantified by him, the assessee is entitled to have the loss re-determined in a subsequent year (CIT v. Khusal Chand Daga [ 1961 ] 42 ITR 177 (SC). On the same reasoning, where the Assessing Officer has not intimated under this section, the quantified amount of loss to be carried forward, the assessee may, in the proceedings for a subsequent year, agitate the question of determination of loss to be carried forward (Keshardeo Shrinivas Morarka v. CIT [1963] 48 ITR 404, 413 (Bom.).
It can be seen that the decision relied upon by the assessee-company is misquoted. If the assessee has not received any intimation about the quantification of loss as required under Section 158, then the assessee has a right to. claim it in accordance with law. However, in the present case the assessee was served with assessment order much before filing of the return of income for 1989-90 and as per the assessment order, there was no loss and on the other hand, loss was converted into income.
15. With regard to the assessee’s contention that it is agitating determination of loss before the appellate authority and as such it was entitled to claim the loss in the return, it is submitted that as per provisions of law, if the assessee succeeds in appeals, the loss will be automatically set off by rectifying the later year’s assessments. In this regard attention is invited to page 2326 of Chaturvedi & Pithisaria, Vol. II, Fourth Edition under the heading “Department’s duty to set off. At the said page and under the said heading the learned authors stated the following :
Department’s duty to set off.The assessee has a statutory right and the Assessing Officer has a corresponding duty to set off the loss carried forward is, later, allowed in appellate or revisional proceedings or as a result of a reference and by that time the assessment for the year or years following are completed, the officer is duty bound to rectify the assessments by allowing proper set off (Kanaka Films (P.) Ltd. v .ITO [1989] 177 ITR 88, 94 (Mad.), Cf. New Ambadi Estates (P.) Ltd. v. C.AG. IT[1971] 82 ITR 87 (Mys.). Also see CIT v. Manmohan Das [1966] 59 ITR 699, 702 (SC).
To submit it precisely, the assessee has no right to claim loss which is negatived by the Assessing Officer when the assessment resulted in a positive figure. The assessee’s contention on this ground cannot be accepted. These submissions will also answer the assessee’s contention that the appeal is continuation of the assessment proceedings and as such should be treated that the assessee is entitled to claim set off of loss in his return.
16. The next contention of the assessee was that the disallowance of set off of losses under Section 143(1)(a) is not correct. In this regard, it is submitted that the provisions under Section 143(1A) clearly lays down that after completion of the assessment under Section 143(3), the Assessing Officer can rectify the intimation under Section 143(1)(a). It may also be seen that Section 154(1)(b) provides for rectifying the order under Section 143(1)(a). If these provisions are not there, any assessee can make frivolous claim in the return of income. Since the Assessing Officer is not expected to go beyond the return of income while passing the intimation under Section 143(1)(a), to prevent such misuse of provision, the Act clearly conferred power to rectify the intimation under Section 143(1)(a). In view of this, the assessee’s submission that the disallowance of claim of carry forward losses cannot be termed as prima facie adjustment is not correct.
17. Lastly, the assessee’s contention was that even assuming Section 143(1A) is applicable, there is no difference between the income determined in the original intimation under Section 143(1)(a) and the order under Section 143(3). As such the Assessing Officer was not right in rectifying the intimation under Section 143(1)(a). In this regard it is submitted that the assessee is not correct in his submission. It may be seen that there is arithmetical mistake in the original intimation under Section 143(1)(a). Instead of taking the returned income as loss of Rs. 2,56,290 the Assessing Officer took it at a positive figure of Rs. 48,16.112. This is clearly a mistake apparent from records. Had the Assessing Officer taken the returned income as loss of Rs. 2,56,270 after the adjustment as per the original intimation under Section 143(1)(a), the total income after the adjustment in the original intimation would have been loss of Rs. 1,86,464. Thus the loss would have been reduced by Rs. 69,806 being the cash compensatory support and additional cash compensation that were held to be taxable basing on the return of income itself.
18. From the above discussion it can be seen that the Assessing Officer did not commit the mistake while rectifying the original intimation under Section 143(1)(a) it would have been a loss of Rs. 1,86,464 as against the loss claimed of Rs. 2,56,270. Still, the Assessing Officer would have levied the additional tax of Rs. 8,062 on this as per the provisions of law. In view of this correct picture, the assessee’s contention that there was no difference between the total income after adjustment in the original intimation under Section 143(1)(a) and the assessment order under Section 143(3) does not hold good. The correct figure that should have been in the intimation under Section 143(1)(a) before rectification as mentioned above ought to have been loss of Rs. 1,86,464 whereas the income as per the order under Section 143(3) is Rs. 48,85,920. Accordingly, the provisions of Section 143(1A) is clearly attracted and the assessee’s argument on this ground also does not hold good. Hence, the order of the Commissioner (Appeals) may be confirmed.
19. Shri Y. Ratnakar, learned advocate for the assessee replied to the above arguments of the learned Departmental Representative as follows: He replied by written submissions dated 16-3-93 and that was also made part of the record. The assessee-appellant submitted that only such adjustments would be those items which are set out in Section 143(1)(a) of the Income-tax Act. Whether the intimation is passed originally or while rectifying it later, the adjustments that would be made are only of those which are set out in Clause (a) to Sub-section (1) of Section 143 and no further. If adjustments could not be validly made under Section 143(1)(a) in the intimation issued it is not open to the Department to rectify it later. A power originally not available for making adjustments in the intimation cannot be available later for rectifying the intimation. The only reason justifying the rectification of intimation is that the officer could have done it originally which he had omitted to do. When no such power of making adjustment was available to the Income-tax Officer originally he cannot do it later in the garb of rectification. The powers of assessment are altogether different and should not be confused with the power to make intimation. The assessee’s contention remained that he can claim the loss based on the return filed for the previous years notwithstanding the assessment being completed not accepting its losses so long as the assessee is contesting the same in appeals and the matters have not become final. It is alternatively contended that in any event whether the assessee has such power or not can only be gone into by process of interpreting sections and the law laid down in various cases on the subject and by no stretch of imagination could it be said that this part of law is so clear that prima facie at the stage of making the intimation without notice to the assessee that the Officer can proceed on the basis that the assessee has no such right. The Department did not touch this aspect in its arguments and it was carefully avoided. In the Department’s arguments, they have invited the attention of the Tribunal to page 3825 Vol. III of Chatwvedi & Pithisaria’s Income-tax Law, Fourth Edition. But it is not shown which part of the passage is relevant and relied upon. In the same para the decision of the Bombay High Court in AH India Groundnut Syndicate Ltd.’s case (supra) also figured and it is not stated anywhere that the decision has been overruled by the Supreme Court, or was dissented from by other High Courts. In such circumstances, the assessee is unable to understand where and how the appellant had misquoted the decision. Perhaps, the learned Departmental Representative wanted to rely upon the decision of the Bombay High Court in B.B. Iranee v. CIT [1963] 50 ITR 366 affirmed, B.B. Iranee v. CIT [1966] 60 ITR 437 (SC). In the Bombay High Court’s decision, the following para at page 377 is relevant:
As regards the loss alleged to have been suffered in and prior to 1941, we would content ourselves by confining that there was no determination of such loss anywhere. Secondly, it is manifest that the business at that time was carried on in Hong Kong and it was not subject to Indian Income-tax. What was not subject to Indian Income-tax cannot be deducted as an allowable loss. The income or loss during that period was completely out of the pale of the Indian Income-tax. There is no evidence anywhere that the business at that time was controlled in India and that the loss occurred on account of the business controlled in India. Mr. Iranee at that time was in Hong Kong and controlled the business there. We agree with the Appellate Assistant Commissioner that the assessee’s claim for setting off loss is not established. In fact, the loss was not determined as such and, therefore, the assessee is not entitled to any relief on this account.
The above passage does not anywhere indicate that where an assessee files returns and claims loss although the assessment is completed and the loss is converted into profit and the assessee filed appeals on such assessments which are pending, the assessee will have no right to claim set off of such loss claimed in the subsequent years. The facts in the above case are different and cannot be compared with the facts on hand. In further appeal, the Supreme Court did not deal with this aspect in B.B. Iranee’s case (supra). There was no discussion at all. It is not known from where the learned authors had put it into the passage.
20. On the contrary, the principle set out by the Bombay High Court’s decision in the case of All India Groundnut Syndicate Ltd. (supra) fully apply and nowhere was it commented that the said decision categorically stating that the assessee’s right is absolute right and is not made conditional upon any computation made by the Income-tax Officer or any notice issued by the Income-tax Officer is not correct. It is, therefore, clear that the submissions of the appellant that it is entitled to claim the loss is correct. At the worst, all one can say is that the position is debatable and not free from doubt. The adjustment that would be done in the intimation either originally or by way of rectification are only those which fall in the realm of prima-facie adjustments under Section 143(1)(a). Merely because the Assessing Officer comes to some conclusion on one of the issues such conclusion do not partake the nature of prima facie adjustments. In this connection it is pertinent to note that in the illustrations set out in 182 ITR 20 (Statutes) the CBDT did not point out that where the losses are set off in a return which are not accepted in the past assessments irrespective of appeals pending over them, should be added back as prima facie adjustments.
21. In the Department’s submissions, it was stated that there is duty on the Department to set off correct losses as and when an assessee succeeds in appeals and, therefore, the assessee has no right to claim any loss negatived by the Assessing Officer although pending in appeal. The question considered here is the right of the assessee and not the duty of the Department. There is no prohibition in the Income-tax Act that the assessee has no such right and that duty on the part of the Department does not deny the right of the assessee to claim such loss. The matter would have been altogether different if the Statute itself had prescribed that losses which are pending items in appeals cannot be claimed by a taxpayer. There is no such restriction contained in the Income-tax Act as on date. Hence, the assessee is entitled to claim such loss. It cannot be denied that the claim of losses made by the assessee is bona fide. Actually if the Income-tax Officer followed the Tribunal’s decisions and completed the assessments, the appellant would have got benefit of loss. Notwithstanding the appellate authority’s order, the assessments for both the years were completed by taxing certain amounts as income which were not in the nature of income. The error, if any, was totally on the Department in doing so. The appeals filed against denial of ascertainment of losses as well as set off of losses had to be withdrawn as not pressed because of retrospective amendment to the Statute which was never anticipated by the appellant. The proposition canvassed by the appellant that the appeal is continuation of assessment and the pendency of the appeal destroys finality of the matter, had not been answered by the Department and thus the contention remained unchallenged. As to the power of the Assessing Officer to issue intimations or carry out such amendments, the position is as under :
(a) An intimation can be sent at any time within two years from the end of the assessment year [Section 143(1)(a)];
(b) An intimation can also be sent after the completion of the assessment under Section 143(3) of the earlier year in the event to any variations in the carry-forward of loss, deduction, allowance or relief [Section 143(1)(b)];
(c) It is open to rectify an intimation under Section 154 so long as an assessment is not made. The moment an assessment is made intimation ceases to exist and becomes part of assessment;
(d) Under Clause (b) to Sub-section (1A) to Section 143 the additional Income-tax shall be varied based on the increase or decrease or the reduction of income in the assessment [Section 143(1A)(b)] [Note: Under this Clause (b) only additional income can be varied but not rectification under Section 154 of the intimation].
Thus the claim of the revenue that intimation can be rectified under Section 154 even after completion of assessment is not correct. Such an absolute provision is not found under the provisions of the Income-tax Act. In any event without going into the controversy, the appellant contends that there is no change in the intimation already sent earlier and the assessment subsequently made under Section 143(3) of the Income-tax Act. One of the conditions for increasing levy of additional tax under Clause (b) to Sub-section (1A) of Section 143 is that the amount of income-tax payable is increased pursuant to the order under Section 143(3) of the Act. In this case, the income under intimation and the income in the assessment order under Section 143(3) is one and the same. Once an assessment is completed, the Officer loses his power to rectify the intimation in any manner except for the limited purpose of varying the additional tax under Section 143(1)(b). The condition for varying the additional tax is that there should be a change in the amount of income between what was originally taken in the intimation and the amount of income assessed. If there is no change in the amount of income Clause (b) to Section 143(1A) cannot be pressed into service. It is submitted that subsequent rectification levying additional tax is bad and cannot be justified on any ground. The fact that the claim before the Commissioner (Appeals) for assessment year 1988-89 was not pressed as disclosed under the order dated 15-3-1991, a copy of which is filed by the Revenue cannot lead to the result that the claim made by the assessee before the Commissioner (Appeals) is frivolous or made without rhyme or reason.
22. Thus after considering the arguments on both sides, the arguments advanced on behalf of the assessee are found to be more acceptable to us. As per the income-tax return, a copy of which is filed by the assessee before us, the profit disclosed as per profit and loss account was Rs. 48,42,697. As per the calculation furnished thereunder in the return, the assessee had clearly shown the unabsorbed loss which is to be carried forward at Rs. 2,56,270 as follows :
Rs.
Profit as per Profit & Loss Account Rs. 48,42,697
Add: Items separately considered
Depreciation 66,616
Investment Deposit 12,00,000 12,66,616
61,09,313
Less : Deductions claimed
Depreciation 93,201
Investment Deposit
under Section 32AB 12,00,000 12,93,201
48,16,112
Less : Brought forward loss 50,72,382
Unabsorbed loss carried forward
(-) 2,56,270
So also the assessee had clearly stated that despite the fact that it is claiming that the brought forward losses amounting to Rs. 50,72,382 was to be adjusted from out of the current year’s profit of Rs. 48,16,112 and despite the fact that the claim of brought forward losses of earlier years was pending before the appellate authorities, the assessee had paid taxes on the ground that the current year’s income was Rs. 48,16,112. Since this is one of the years in which Section 115J is to be applied, 30 per cent of the book profits was returned at Rs. 2,91,090. The assessee was served with an intimation dated 28-2-1990. The income-tax return was filed on 28-12-1989. Retrospective amendments in the shape of Sub-sections (iiia) to (iiic) were inserted in Section 28 of the IT Act by Finance Act, 1990 which was introduced in the Lok Sabha on 19-3-1990. Thus it can be seen that both at the time of filing the IT return by the assessee for assessment year 1989-90 or by the date when an intimation was sent to him on 28-2-1990 Finance Act, 1990 was not even introduced in the Lok Sabha. Sub-section (iiia) to Section 28 was inserted with retrospective effect from 1-4-1962. Sub-section (iiib) was inserted in the said section with retrospective effect from 1-4-1967 and Sub-section (iiic) was inserted with retrospective effect from 1-4-1972. Till the retrospective amendment is brought out into Section 28, the question whether cash compensatory support, excise duly rebate, duty drawback, sale proceeds of REPs are actually capital receipts or revenue receipts is a highly debatable issue and there is strong divergence of opinion in this regard even among High Courts. That is why the Legislature had to bring about a retrospective amendment to do away with the controversy and pronounce the last word on the subject. So till the last word on the subject was pronounced by the Legislature itself by introducing an amendment in Section 28 which came to be passed much after 19-3-1990 they are highly debatable issues. The income-tax return was filed by the assessee in this case for assessment year 1989-90 on 28-12-1989 and the intimation under Section 143(1)(a) was also made on 28-2-1990. In the intimation the returned income was taken at Rs. 48,16,112 instead of loss of Rs. 2,56,270. According to the Department this is a pure mistake and this mistake led to passing the rectificatory order dated 25-9-1991 whereas according to the assessee there is no mistake and it is a conscious order passed by the Income-tax Officer without giving any intimation whatsoever to the assessee and without also hearing him at the same time refusing to recognise the past losses at Rs. 50,72,382. Negativing the case of the assessee refusing to recognise past losses and refusing to set off those losses from the current year’s income, does not amount to prima facie adjustment made under Section 143(1)(a) and no such power for making such prima facie adjustment vested in the Income-tax Officer who passed the intimation dated 28-2-1990. For that reason, the intimation is bad under law. It is also bad for the reason that before passing the intimation dated 28-2-1990, the assessee was never heard and no reasons were assigned as to why the losses claimed were not considered and why set off of the losses were not ordered. The prime question to be decided is whether the intimation dated 28-2-1990 under which the income of the assessee was stated at Rs, 48,16,112, is the income assessed by the Income-tax Officer or whether it is only a mistake for which only the rectification is sought to be made by invoking Section 154. It is significant to note that the regular assessment was completed under Section 143(3) on 30-4-1990 after the retrospective amendment to Section 28 took place in March 1990. It is no doubt true that by virtue of the effect of retrospective amendment brought out to Section 28, the claim of past losses to be set off put forward by the assessee at Rs. 50,72,382 which claim was pending before the appellate authorities at various stages simply vanishes and that claim would no longer be available to him. That is the reason why he had not pressed the appeal for assessment year 1988-89 before the Commissioner of Income-tax (Appeals), a copy of which was filed before us. In the order under Section 143(3), the income assessed stood at Rs. 48,85,920 which is the same figure which was stated in the intimation dated 28-2-1990. As regards the additional tax levied on Rs. 69,806 also there was no change. It remains at Rs. 8,062 both in the intimation as well as in the assessment. The Department purported to have issued notices under Section 154 thrice, Le., on 26-7-1990, 28-8-1990 and 2-5-1991 whereas the assessee filed petition under Section 154 twice on 23-5-1990 and 5-7-1990. With reference to these notices and petitions filed under Section 154 only one order of rectification was passed on 19-9-1991. As to the question when was the mistake found out by the Department for the first time, it would appear that it had realised the mistake on 26-7-1990, Le., when the first notice under Section 154 was issued. The Revenue was notable to place before us any circumstance under which it had realised the mistake which constituted the reasons for issuing notice under Section 154 for the first time on 26-7-1990. Therefore, we feel it difficult to accept the contention of the Department that by sheer mistake committed by the Income-tax Officer an intimation was first sent and in order to rectify that mistake a series of notices were sent. Therefore, we hold that the intimation dated 28-2-1990 was conscious order passed by the Income-tax Officer impliedly rejecting the main contention of the assessee that it is entitled to set off losses suffered by it amounting to Rs. 50,72,382.
23. The next question would be whether the Assessing Officer is entitled to impliedly reject the contention of the assessee for set off of past losses of Rs. 50,72,382 can be justified as part of the power vested in the Income-tax Officer to make prima facie adjustment under Section 143(1)(a). Proviso (i) (ii) and (iii) which are relevant for our purpose are as follows:
Provided that in computing the tax or interest payable by or refundable to, the assessee, the following adjustments shall be made in the income or loss declared in the return, namely:
(i) any arithmetical errors, in the return, accounts or documents accompanying it shall be rectified;
(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed;
(iii) any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts, or documents, is prima facie inadmissible, shall be disallowed.
Here in this case, we are concerned with the question of disallowance of losses. Obviously, the disallowance is not even according to the Department justified either on the basis of information available in the return or accounts or documents filed along with the return. It is essential to note that by the date of intimation, namely, 28-2-1990, even retrospective amendment was not introduced to Section 28. It was introduced only one month after the intimation was issued. By that date there was no Supreme Court decision deciding whether the CCS, Duty Draw Back, etc., were revenue receipts or capital receipts which are includible in the income of the assessee. On the other hand, by the date of the intimation, it is a highly debatable issue and the claim of the assessee was pending before the appellate authorities. Even this fact also can be known only when the Assessing Officer is careful to look into the past records of the assessee. In such circumstances, disallowing the loss claimed for set off cannot be justified as prima facie adjustment. The power to make prima facie adjustment, especially disallowance of losses and the scope of CBDT’s Circular No. 549 dated 31-10-1989 was exhaustively discussed by the Bombay High Court in Khatau Junkar Ltd. ‘s case (supra). In the head note of the decision at pages 58 and 59, the ratio of the decision with regard to this aspect is found noted as follows :
In connection with this new provision, the Central Board of Direct Taxes issued Circular No. 549 dated 31-10-1989. The circular points out, inter alia, that under the new scheme of assessment, the requirement of passing an assessment order in all cases where returns of income are filed, has been dispensed with and the issue of an acknowledgement slip to the assessee will be the end of the matter, if he had correctly paid tax and interest, if any, due on the basis of the return. But, if, on the basis of the return, any amount is found due from the assessee, it can be recovered and if any refund is due to the assessee, it can be granted without passing an assessment order. The assessment order will be passed only in a very limited number of cases selected for scrutiny. While dealing with the adjustments to be made in the income or loss declared in the return, the circular provides in paragraph 5.4 that prima facie adjustments mentioned in Clause (ii) can be-made only on the basis of information available in the return or the accompanying accounts or documents. The examples given of such prima facie admissible or inadmissible adjustments are very illuminative. The illustrative list clearly points out that only adjustments which are, on the basis of the return and documents accompanying it, allowable or disallowable, can be adjusted. The Central Board of Direct Taxes has issued a Circular No. 581 dated 28-9-1990 which also proceeds on a similar assumption. According to the Board, the sums disallowed as prima facie inadmissible under Section 143(1)(a) in the absence of requisite evidences of payment cannot be subsequently allowed under Section 154. This is because the scope of the powers to make prima facie adjustments under Section 143(1)(a) is somewhat coterminous with the power to rectify a mistake apparent from the record under Section 154. Therefore, the Board itself has viewed the power to make adjustments as coterminous with the power to rectify mistake apparent from the record under Section 154. In the absence of any specific provision in the Income-tax Act which disallows a deduction because a specific document specified in that section is not annexed to the return, the Income-tax Officer cannot, under Clause (iii) of the proviso to Section 143(1)(a), disallow a claim or a deduction merely because, in his view, adequate evidence in support of such a claim or deduction is not before him. He can disallow a claim for deduction only if he is satisfied on the basis of the material which is before him, that the assessee is not entitled to such a deduction. The use of the phrases “prima facie admissible” in Clause (ii) to the proviso and “prima-facie inadmissible” in Clause (iii) to the proviso, also lend support to this interpretation. If anything more is read into the power to make adjustments under Section 143(1)(a), such power would be grossly arbitrary and unreasonable and in total violation of the principle of natural justice, because Section 143(1)(a) does not provide for any notice being given to the assessee, nor does it provide for any hearing being given to the assessee before disallowing the claim made by him.
Therefore, according to the above decision, since no record or document is appended to the return filed for assessment year 1989-90 if it is the case of the revenue that it appeared that the whole claim made by the assessee for carry forward of loss of Rs. 50,72,382 is prima-facie disallowable then disallowance of such loss towards prima-facie adjustment is not justified on the part of the Income-tax Officer since it is not warranted under law or he is not empowered to do so under law. Here itself, another question may be considered on which the parties advanced arguments. The question is whether carry forward of loss of the earlier years can be allowed only if such right is recognised by the Income-tax Officer or by any of the appellate authorities. This specific stand was taken by the Revenue whereas it was the contention of the assessee that even though the right to claim set off of past losses for earlier years was not recognised or upheld by the Income-tax Officer or by any of the appellate authorities as yet, and even if such claim is merely pending before the lower appellate authorities, the assessee can put forward the claim to set off of past years’ losses from the current year’s profits. It is also the contention of the assessee that the issue whether the loss in any year should be carried forward to the following year and set off against the profits and gains of the subsequent year under Section 72(2) has to be determined by the Income-tax Officer who deals with the assessment of the subsequent year. Now that the assessment for 1989-90 is to be completed the assessee is well within his rights to claim carry forward of earlier year’s losses and also claim set off from the profits and gains of this year under Section 72(2). Further the Hon’ble Supreme Court held in Manmohan Das’s case (supra) as per the head note of the decision at page 700 as follows :
A decision recorded by the Income-tax Officer who computes the loss in the previous year that the loss cannot be set off against the income of the subsequent year is not binding on the assessee.
Therefore, it is very clear that even though there is specific finding in the assessments of past years in which assessment orders the Income-tax Officer might have stated that the assessee is not entitled to set off of losses of previous years is not binding against the assessee. Despite the said finding, the assessee can put forward the claim for set off in a subsequent year before the Income-tax Officer. Therefore, in the facts of this case, it is contended that it is true that the assessee had previously lost its case before the assessing authorities inasmuch as its claim for set off of losses to the extent of Rs. 50,72,382 was not recognised but still, he can put forward the said claim before the Income-tax Officer making the assessment for the current year, namely, 1989-90.
24. The assessee had relied upon All India Groundnuts Syndicate Ltd.’s case (supra) and Manmohan Das’s case (supra) in support of its contention. As against this the Revenue relied upon two extracts from Chaturvedi & Pithisaria’s Income-tax Law, Fourth Edition, Vol. III, page 3825 from which is already extracted above. A reading of the extract would clearly show that the learned authors support the view of the assessee instead of supporting the Department. Having regard to the Supreme Court’s decision, we hold that despite the fact that in past years, the claim of the assessee for carry forward losses was never recognised but still the right to claim set off of carry forward losses from the current year’s profit is still available to him under law. The Department’s contention that unless the right of the assessee for carry forward losses was recognised the carry forward cannot be ordered is wrong under law and, therefore, rejected.
25. Another contention of the assessee is that the claim to set off of losses of earlier years was pending in the appeal proceedings and since the appeal proceedings are only continuation of assessment proceedings, no finality was reached in the assessments of earlier years and all assessments of earlier years were deemed to be continuing and in support of this contention the assessee had cited J.K. Synthetics Ltd. ‘s case (supra). Even by virtue of this legal position, the quantification of loss of earlier years did not reach any finality and it should be deemed to be still in continuation. Therefore, for this reason also, the Income-tax Officer while considering the assessment proceedings for 1989-90, should consider the allow ability or otherwise of the claim for set off of past years’ losses from the current year’s income. Another contention is that after regular assessment order under Section 143(3) was passed, the earlier Intimation under Section 143(1)(a) would be merged into that order and would lose its identity thereafter. The contention of the Revenue on the other hand, is that despite passing the regular assessment order under Section 143(3), the right of rectification of intimation under Section 143(1)(a) is still available in view of the provisions of Section 143(1)(b), 143(lA)(b) read with Section 154(1)(b). The assessee contended that under Section 143(lA)(b) applied only in cases where additional Income-tax is increased or reduced, then only the said provision can be invoked but in this case, there is neither increase nor reduction of additional tax when we compare the intimation dated 28-2-1990 on the one hand and regular assessment made under Section 143(3) dated 30-4-1990 on the other. The assessed income is one and the same in the intimation as well as in the regular assessment and in such a case, the provisions of Section 143(lA)(b) do not come into play at all and cannot be invoked. An intimation only can be sent after the completion of assessment under Section 143(3) of the IT Act of the earlier year in the event of any variation in the carry forward loss, deduction, allowance or relief granted in the earlier year’s assessment. For the provisions under Section 143(1)(b) to come into play, the following conditions are to be fulfilled :
The earlier year’s assessment must be completed subsequent to giving intimation under Section 143(1)(a) and due to the assessment order being passed for the subsequent year there is any variation in the carry forward loss, deduction, allowance or relief claimed in the return as a result of which any tax or interest is found due, then an intimation can be sent to the assessee specifying the sum so payable. The sub-section contemplates giving of another intimation and not passing of rectlficatory order under Section 154. In this case the intimation dated 28-2-1990, was purported to have been rectified by order dated 28-9-1991. The reasons assigned in the order for taking up the rectification were the following :
(1) While processing the return under Section 143(1)(a) on 28-2-1990, the total income returned was taken at Rs. 48,16,112 instead of loss returned of Rs. 2,56,270;
(2) While finalising the above proceedings, additional tax under Section 143(1)(a) was calculated only on the addition of Rs. 69,806 instead of Rs. 51,42,188.
It is obvious that among the reasons assigned, none of the reasons fulfils the requirement under Section 143(1)(b) and none of the reasons assigned in the order dated 25-9-1991 would warrant the invocation of Section 143(1)(b). Neither the earlier assessment was completed subsequent to sending of intimation nor was there any variation in the carry forward loss, deduction, allowance or relief as a result of such assessment of earlier years. Thus we hold that Section 143(1){b) also does not justify the rectification under Section 154 on 29-9-1991.
26. We have already set out the reasons for which the rectification under Section 154 was taken up and the impugned order dated 25-9-1991 was passed by the Assessing Officer. The question is whether the reasons constitute valid grounds for rectification. In this connection we have to observe without fear of contradiction that the Income-tax Officer had gone into the merits of the claim about disallowance of loss. Whether that can be done or not is the question. In the Bombay High Court’s decision in Khatau Junkar Ltd. ‘s case (supra) it was held in the head note at page 61 as follows :
Held, (i) that, in the present case, when by a unilateral act, without giving any hearing to the assessee, the Income-tax Officer had disallowed the claim by going beyond the return and the documents annexed to it, the remedy by way of writ could not be challenged on the ground of an alternative remedy, such as a rectification under Section 154 which could not correct substantive errors or a revision under Section 264 being now made available to the aggrieved person. These could not be considered as efficacious remedies in the present circumstances. Hence, the remedy under Article 226 of the Constitution was not barred.
In that case, the intimation under Section 143(1)(a) was issued denying claim of investment allowance and disallowing purchases exceeding Rs. 10,000 despite the fact that the assessee invoked Rule 6DD(j) and also disallowing a sum of Rs. 75,165 paid as ex gratia to its employees and a sum of Rs. 83,631 claimed as deduction. However, the Income-tax Officer had disallowed all of them while sending intimation under Section 143(1) (a) on the ground that those are all to be disallowed on the basis of the return purporting them to be prima facie adjustments. The Bombay High Court held with regard to each of those claims as follows as per the head note at page 61:
that, with regard to the claim for investment allowance, the assessee had furnished details regarding the plant and machinery in its tabulated statement. The claim for investment allowance could not be disallowed by the Income-tax Officer by an intimation under Section 143(1)(a);
that the next claim of the petitioners was in respect of a sum of Rs. 75,165 paid ex gratia to their employees. In the rectification application, this claim had been accepted; that, in respect of cash purchases exceeding Rs. 10,000 there was no material in the return or the documents annexed to it, which would indicate that Rule 6DD(j) was not attracted. Therefore, there was no basis for disallowing that claim, prima facie, looking to the return and the documents annexed to it; that the sum of Rs. 83,631 was not something which could be disallowed on the face of the return. An examination of the nature of the accounts maintained by the assessee was clearly necessary before any conclusion could be drawn as to whether the expenditure should be allowed as a deduction.
All these disallowances were, therefore, ultra vires the powers of the Income-tax Officer under Section 143(1)(a).Nowhither case before us also, unless the intimation dated 28-2-1990 was passed after the retrospective amendment made in Section 28, by merely looking into the returns or to the profit and loss account or back records of earlier years, it cannot be said that the assessee is not entitled to set off of unabsorbed losses of Rs. 50,72,382. Therefore, we have to hold that the intimation dated 28-2-1990 is ultra vires the powers of the Income-tax Officer. We also agree with the contention of the assessee that what the Assessing Officer cannot do by invoking the provisions to Section 143(1)(a) while sending the intimation cannot be available to him at the time of rectification under Section 154. When he does not have powers to disallow the loss at the time of intimation under Section 143(1)(a) he cannot get such powers which are not there while invoking the provisions under Section 154. There is no warrant for us to decide generally whether the intimation under Section 143(1)(a)can be rectified or not but from the facts and circumstances of this case, we are surely of the opinion that the rectification dated 25-9-1991 is not justified and is illegal and therefore, cannot be supported. We also agree with the contention of the assessee that after the regular assessment under Section 143(3) is passed, the intimation under Section 143(1)(a) merges into it and afterwards it cannot be rectified except for the limited purpose of varying additional tax there should be change In the amount of income between what was originally taken in the intimation and the amount of income assessed. If there is no change in the amount of income, Clause (b) to Sub-section (1A) to Section 143 cannot be pressed into service.
27. For all the various reasons given above, we hold that the rectification dated 25-9-1991 passed by the Assessing Officer is illegal, unjustified and cannot be supported under law or on facts. So also, the order of the Commissioner of Income-tax (Appeals) is liable to be set aside. We allow the appeal of the assessee.