ORDER
Ammini, JM
1. The appeal and the stay petition are by the assessee. The assessment year involved is 1994-95. The point at issue in the appeal is regarding the claim of deduction in respect of corporate guarantee obligation amounting to Rs. 18,67,21,730 and whether this amount is adjustable u/s 143(1)(a) intimation of the Income Tax Act, 1961.
2. The assessee is a company. It filed its return of income, for the assessment year 1994-95, on 8-6-1995 declaring a total income of Rs. 15,07,70,963. It made a claim in the “Statement of Consolidation of Return of Income” as follows :
"Corporate Guarantee Obligation, not debited to Profit and Loss account Rs. 18,67,21,730" While processing the return u/s 143(1)(a) of the IT Act, the AO disallowed the claim for the following reasons :
“This payment is in the nature of discharge of a liability on behalf of another company of the group, viz., UB Elastomers Ltd. as a guarantor of the loans borrowed by M/s. UB Elastomers Ltd. Since this payment is a recoverable debt from M/s. UB Elastomers Ltd., the same cannot be claimed as a deduction in the statement of computation of income. Hence disallowed.”
He also levied additional tax u/s 143(1A) of the Act.
3. Against the above finding of the AO, the assessee went in appeal to the CIT(A). It was pleaded before him that the claim represented corporate guarantee obligation incurred by the assessee as a part of the business guarantee carried on by the company and that the payment was allowable as a deduction as per the decision of the Madras High Court in the case of CIT v. Amalgamations (P.) Ltd. [1977] 108 ITR 895. It was further contended that the assessee had written off the entire amount in the books of account for the year ended 31-3-1995.
4. The CIT(A) distinguished the facts of the decision reported in Amalgamations (P.) Ltd.’s case (supra). It was a case where assessee guaranteed loans of a subsidiary company and the subsidiary company went into liquidation, the assessee paid the amount borrowed and realised some amounts from the liquidator; it wrote off, in its accounts, the difference between the amount paid over that received from the liquidator and claimed it as an expense. In this case, the assessee, according to the CIT(A), did not incur any expense in the year under consideration, nor did it write off any such amount in the accounts for the year. The accounts or documents accompanying the return clearly revealed this aspect. According to the CIT(A), the claim was made solely in the computation of income for income-tax purposes. There was not even any details to show how the claim was made up. According to him, merely because the assessee cited some case law (which clearly had no direct relation to the context or facts) it could not be stated that the assessee’s claim for deduction was allowable, prima facie. In the view of the CIT(A), the claim for deduction was liable to be disallowed prima facie on the basis of information and the documents accompanying the return. Therefore, he upheld the disallowance as made by the AO.
5. Aggrieved by the above order of the CIT(A), the assessee is on further appeal before us. On behalf of the assessee, Senior Advocate Shri G. Sarangan and Advocate Shri S. Parthasarathi, appeared before us. On behalf of the assessee, it is argued that the claim of the assessee cannot be disallowed u/s 143(1)(a). What is to be prima facie adjusted is stated in section 143(1)(a). The claim of the assessee will not come under all what is stated in the above section. It is contended that the AO is not justified in making an adjustment by disallowing a claim made on behalf of the assessee in an order u/s 143(1)(a). The AO can do so only if the claim is prima facie inadmissible on the basis of the information available in the return or accounts or documents accompanying the return. The learned counsel for the assessee took us through the 97th Annual Report for the assessment year 1993-94. Item No. 19, page 28, is ‘Notes on accounts for the year ended March 31, 1994’. Item No. 5, page 29, relates to ‘Contingent Liabilities not provided for’. According to the assessee, Item No. 8, in page 29, does not form part of item 7, in the same page. Item 8(a) says “The Company is a co-promoter of UB Elastomers Limited. The implemention of the project by that Company has been suspended for the present. Item 8(b) states : “Guarantees of Rs. 1,88,142 lacs including interest furnished to the bankers by the company as co-promoter of the company have been invoked. Of this Rs. 200 lacs paid before 31st March, 1994 has been absorbed in these accounts and treated as admissible deduction for tax purposes. Of the balance Rs. 1,581.93 lacs has since been paid while Rs. 99.49 lacs covered by a bank guarantee is yet to be enforced and paid. These payments have not been considered in the accounts”. Thus, it is the contention, on behalf of the assessee, that each item deals with different items and do not form part of each other. It is explained that Item No. 11 does not form part of Item No. 10. Likewise, Item No. 12 does not form part of Item No. 11. It is contended that merely because the assessee has not made any provision for the claim put forward before the authorities below, the claim cannot be disallowed holding that this is a prima facie inadmissible item. According to the assessee, it has only a theoretical right to recover the guarantee obligation. The question whether there is any provision or not is not material for deciding the issue whether the assessee is entitled to deduction in respect of the corporate guarantee obligation. It is further contended that corporate guarantee obligation is not an item which can be prima facie adjusted. As this is a debatable issue, it is contended that it has to be decided by giving an opportunity to the assessee of being heard. The assessee has also produced schedules forming part of the accounts for the year ended 31st March, 1994. It is argued that the facts of the case and the issue are squarely coveted by the decision of the Madras High Court reported in Amalgamations (P.) Ltd.’s case (supra). Further reliance is placed on the following case laws on behalf of the assessee :
(i) God Granites v. Under Secretary, CBDT [1996] 218 ITR 298/85 Taxman 536 (Kar.),
(ii) Coates of India Ltd. v. Dy. CIT (No. 1) [1995] 214 ITR 498 (Cal.),
(iii) Coates of India Ltd. v. Dy. CIT (No. 2) [1995] 214 ITR 504 (Cal.),
(iv) Circular No. 689 dated 24-8-1994, [1994] 209 ITR (St.) 75,
(v) Adamas Gem Industries Ltd. v. Smt. Neela Krishnan [1993] 203 ITR 737 (Bom.),
(vi) JKS Employees’ Welfare Fund v. ITO [1993] 199 ITR 765 (Raj.), and
(viii) Khatau Junkar Ltd. v. K.S. Pathania [1992] 196 ITR 55/61 Taxman 157 (Bom.).
It is argued, on behalf of the assessee, that all the above decisions will go to show that a debatable issue cannot be decided u/s 143(1)(a) without making any enquiry. It is, therefore, prayed that the claim of the assessee in respect of corporate guarantee obligation be allowed.
6. On the other hand, the learned departmental representative, Shri Abhay Kumar, argued that the item under consideration in this appeal is a prima facie adjustable item. The assessee itself has created a situation whereby the above item is made a prima facie adjustable item u/s 143(1)(a). He contended that the decision of the Madras High Court reported in Amalgamations (P.) Ltd.’s case (supra) is not applicable to the facts of the present case. According to the learned departmental representative, the assessee here is not carrying on any guarantee business but is only a co-promoter. The assessee has to claim the corporate guarantee obligation in the year in which it arises. He brought to our attention to what is held by the Madras High Court. It held that in view of the assessee’s business having been held to include furnishing guarantees to debts borrowed by its subsidiary companies, the assessee incurred this loss in the course of carrying on its business; that though the assessee was obliged to pay the bank during the previous year relevant to the assessment year 1958-59, it did not become a loss in that year because there were possibilities of recovery from the liquidators as was clear from later recoveries and that as the final payment was received only in the previous year relevant to the assessment year 1962-63, the loss arose only then and hence the Tribunal was right in allowing it in that year. The learned departmental representative laid emphasis on the assessment year in which the deduction has to be claimed. Hence, he argued that the assessee is not entitled to get the deduction in this assessment year. Further, he contended that the assessee has not created any provision for this claim. Nothing is known whether it is invokable in this year or not. The learned departmental representative took us through the various objections of the auditors mentioned on page 5 of the 97th Annual Report for 1993-94. He further argued that the liability is not ascertainable. If guarantee is given it is recoverable. Hence, he argued, the AO is justified in disallowing the claim on the ground that prima facie the claim is inadmissible.
7. In reply, it is argued on behalf of the assessee that from the argument of the learned departmental representative itself the point is a debatable one. Hence, if the AO has any doubt, the point has to be decided on merits.
If documents are not available, the AO has to issue notice to the assessee. Hence, it is clear from the provisions of the IT Act that without any investigation the claim made by the assessee should not have been disallowed u/s. 143(1)(a) of the Act. According to the assessee, it has already invoked the corporate guarantee obligation. A part payment has already been made. Interest on corporate guarantee obligation has also been invoked. Hence, it is argued that without making an inquiry, a debatable issue on which the claim rests cannot be disallowed u/s 143(1)(a). Therefore, it is argued that the claim has to be allowed and the orders of disallowance have to be found to be incorrect.
8. On a careful consideration of the rival submissions, we are of the opinion that the claim of the assessee in respect of corporate guarantee obligation amounting to Rs. 18,67,21,730 cannot be prints facie adjusted U/s 143(1)(a) holding that it is an inadmissible deduction. We find that u/s 143(1)(a) the AO is empowered to make the following adjustments :
(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 information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed provided that where adjustments are made under the first proviso, an intimation shall be sent to the assessee notwithstanding the fact that no tax or interest is found due from him after making such adjustments. In our considered opinion, the claim of the assessee will not come under any of the above adjustments empowered to be made by the AO while processing the return of income u/s 143(1)(a). From the facts and circumstances of the case, it is clear that this claim should not be decided without making an inquiry. In the account itself the assessee has shown that corporate guarantee commission has been invoked and the assessee has made part payment of the same. Hence, the contention raised on behalf of the revenue that the assessee has not made a provision in respect of the claim will not hold good.
9. Now, we have to see whether the decisions cited on behalf of the assessee apply to the facts of this case :
(a) The facts of the reported decision, by the Madras High Court in the case of Amalgamations (P.) Ltd. (supra) are that the assessee company had guaranteed loans taken by a subsidiary company on an overdraft arrangement with a bank. The subsidiary company went into liquidation in 1955 and the assessee-company as guarantor was obliged to discharge the liability to the bank. After adjusting the amount recovered from the liquidators the sum due to the assessee-company from its subsidiary was Rs. 9,08,764 and the assessee claimed this amount as a business loss in its assessment for 1958-59. The assessee received from the liquidators during the subsequent years 1959-60 to 1962-63 varying sums totalling Rs. 4,85,508.28. The ITO held that the loss was not incidental to the business of the assessee and was a capital loss which did not also come u/s 12B – the ITO also treated the receipts during 1959-60 to 1962-63 as income as a protective measure. The AAC on appeal held that the loss was not a business loss but held that subsequent receipts could not also be taxed as income. In the further appeals to the Tribunal, both by the assessee and department, the Tribunal held that the assessee had guaranteed the loans in the course of its carrying on its business and the loss was admissible as a deduction. It, however, held that as the assessee had received the last of the payments from the liquidator in the previous year relevant to the assessment year 1962-63, only the balance of Rs. 4,23,256 remained unrecoverable and it was this amount which was allowable as a deduction in the assessment year 1962-63 :
(i) The only case of the learned departmental representative on this decision is in which year the claim has to be made. But the principle is the same that the guarantee amount paid by the assessee is an allowable deduction. In this case, the asses see has guaranteed the amount, a part payment is also made. Therefore, the decision of the Madras High Court does support the case of the assessee.
(b) The Bombay High Court decision in the case of Khatau Junkar Ltd. (supra) also deals with adjustments to be made u/s 143(1)(a).
(c) The Rajasthan High Court has also, in the case of JKS Employees Welfare Fund (supra), dealt with the scope of section 143(1)(a).
(d) In the case of Adamas Gem Industries Ltd. (supra), the Bombay High Court held :
“… that, under section 143(1)(a), proviso, clause (iii), in computing tax payable by, or refundable to, the assessee, 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. The present adjustment did not fall within the parameters of this proviso. The intimation and the consequent claim for additional tax were not valid and were liable to be quashed.”
(i) Relying on the above decision, it can be held that, in this case, the lower authorities are not justified in disallowing the claim of the assessee in respect of corporate guarantee obligation. This decision, therefore, also supports the case of the assessee that the claim of the assessee cannot be adjusted u/s 143(1)(a).
(e) In the case of Coates of India Ltd. (supra) the Calcutta High Court has observed :
“An order under section 143(1)(a) of the Income-tax Act, 1961, may or may not be followed by a regular assessment order under section 143(3) of the Act. The option is with the Assessing Officer. The jurisdiction under section 143(1)(a) is limited to the obvious and also to that which is deductible from the return as filed and only when there is no doubt or debate. In such circumstances, the order becomes final in the sense that it is effective for the purposes of raising a demand on the assessee of obliging the Department to make a refund to the assessee. Where, however, the order under section 143(1)(a) is followed by a regular assessment under section 143(3), the order under section 143(1)(a), insofar as it is contrary to the regular assessment under section 143(3) ceases to be executable and becomes ineffective. Section 143(1)(b) deals with a situation arising out of the passing of orders under section 143(3), etc., in respect of an earlier assessment year and not in respect of the year in question.”
Finally, it was decided by the Calcutta High Court that the AO himself could not have decided any debatable issue u/s 143(1)(a) of the IT Act. In this case also, it is the case of the assessee that this is a debatable issue and, therefore, cannot be decided in an order u/s 143(1)(a).
(f) Again, the Calcutta High Court held in Coates of India Ltd.’s case (supra) that since the issue was debatable, the notice could not be issued under section 154 and the AO could not decide it u/s 143(1)(a). In our opinion, the decisions of the Calcutta High Court do support the case of the assessee.
(g) In the case of God Granites (supra) the Hon’ble Karnataka High Court held that under the first proviso to sec. 143(1)(a), the AO can make an adjustment in the income, by disallowing the deduction claimed in the return, only if it is prints facie inadmissible, on the basis of the information available in such return or accounts or documents accompanying the return. The fact that, on an ultimate analysis, the assessee may not be entitled for the deduction claimed from the total income does not mean that recourse can be had to disallowance u/s 143(1)(a), dispensing with hearing and denying opportunity to the assessee to challenge the assessment. Under the guise of effecting an adjustment u/s 143(1)(a), the AO cannot decide debatable issues. This decision also supports the case of the assessee.
10. From what is stated above, it is clear that the AO cannot decide a debatable issue in an order u/s 143(1)(a). Further, under the provisions of section 143(1)(a), the AO is empowered to disallow a claim only if it is prima facie inadmissible. In this case, the AO could not have come to the conclusion that the claim of the assessee is prima facie inadmissible from the information available in the return filed by the assessee without making an enquiry. Hence, we hold that the authorities below are not justified in making an adjustment u/s 143(1)(a) disallowing the claim of the assessee for corporate guarantee obligation on the ground that it is an inadmissible deduction. We reverse the orders of the authorities below on this count. We delete the disallowance.
11. Coming to the levy of additional tax under sec. 143 (1A), since we have deleted the addition itself, we hold that the levy of additional tax has also to be deleted.
12. In the result, the appeal filed by the assessee is allowed.
13. Coming to the stay petition filed by the assessee, since we have already taken up the appeal for consideration and decided in favour of the assessee, the stay petition does not survive. It is dismissed as redundant.