Commissioner Of Income Tax-I, Chennai v. M/S. Fal Industries Ltd., Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS THE HONOURABLE MRS. JUSTICE PRABHA SRIDEVANANDTHE HONOURABLE MR. JUSTICE K.K. SASIDHARAN T.C.(A) Nos.495 and 496 of 2004 Commissioner of Income Tax-I,Chennai... Appellantversus M/s. FAL Industries Ltd.,Chennai... Respondent in both appeals Prayer :- T.C.495/2004 filed against the order of Income TaxAppellate Tribunal, Madras 'A' Bench dated 25.8.2003 passed in ITANo.779/Mds/96.Assessment year 1991-92 and 1992-93 Prayer : T.C.496/2004 filed against the order of Income TaxAppellate Tribunal, Madras 'A' Bench dated 25.8.2003 passed inI.T.A. No.780/Mds/96 and against the order of the Commissioner ofIncome Tax (Appeals) VII Madras in 41/94-95 & 69/95-96 dated11.3.96 and against the order of the Deputy Commissioner of IncomeTax, Special Range II, Madras 34 in PAN GIR No.047-002-CR-9845/5-Fdated 15.3.95 for the assessment year 1992-93 & 1991-92 orderdated 28.2.94. For Appellant :: Mrs. Pushya Sitaraman, Sr. Standing Counsel The assessee is a manufacturer of typewriters and vacuumcleaners. It commenced a new industrial undertaking for themanufacture of the above equipments during the previous year ending31.12.1981 relevant to the assessment year 1982-83. The initialassessment year for the purpose of deduction under Section 80HH of https://hcservices.ecourts.gov.in/hcservices/ the Income Tax Act in respect of this new industrial undertaking,therefore, was 1982-83. The assessee claimed that the tenassessment years would end with 1992-93 because there was a changeof the previous year with regard to a particular assessment year,viz. 1991-92. However, the Assessing Officer, following 185 I.T.R.63, held that it that would apply to this case and held that whatis important is "the natural sequence of ten assessment years", anddid not accept the assessee's claim. The Commissioner (I.T.Appeals) confirmed this. The Tribunal, however, decided to allowthe claim of the assessee and therefore, the Department has filedthe appeals on the following substantial questions of law:- "1.Whether in the facts and circumstances of the case, the Tribunal was right in holdingthat sales tax does not form part of totalturnover for the purpose of calculation ofdeduction under Section 80HHC ?2.Whether in the facts and in thecircumstances of the case, the Tribunal wasright in holding that amount received out oflocal sale does not form part of the totalturnover, for the purpose of calculation ofdeduction under Section 80 HHC ?3.Whether in the facts and in thecircumstances of the case, the Tribunal wasright in holding that the interest accrued inthe present assessment year is not assessableto tax for the assessee following themercantile system of accounting ?"4.Whether for the assessment year 92-93the Tribunal is right in allowing the benefitunder Section 80HH for the 11[th] year when thesection specifically allows benefit only for 10assessment years of usual sequence?" Substantial question of law No.1 :- 2.The learned Senior Standing Counsel for the Revenue wouldsubmit even at the outset that the first question of law is decidedagainst the Revenue by the Supreme Court in 290 ITR 667 (C.I.T. v.Lakshmi Machine Works). Substantial question of law No.2 :- 3.As regards the second question law, the learned Sr.StandingCounsel submitted that the same was also decided against therevenue in 297 ITR 107 [Commissioner of Income Tax v. AshokLeyland Ltd.]. Substantial question of law No.3 :- 4.The learned Sr. Standing Counsel submitted that the claim ofexclusion in respect of the interest accrued cannot be granted https://hcservices.ecourts.gov.in/hcservices/ Substantial question of law No.1 :- 2.The learned Senior Standing Counsel for the Revenue wouldsubmit even at the outset that the first question of law is decidedagainst the Revenue by the Supreme Court in 290 ITR 667 (C.I.T. v.Lakshmi Machine Works). Substantial question of law No.2 :- 3.As regards the second question law, the learned Sr.StandingCounsel submitted that the same was also decided against therevenue in 297 ITR 107 [Commissioner of Income Tax v. AshokLeyland Ltd.]. Substantial question of law No.3 :- 4.The learned Sr. Standing Counsel submitted that the claim ofexclusion in respect of the interest accrued cannot be granted https://hcservices.ecourts.gov.in/hcservices/ because, before the Assessment Officer, the assessee had claimedexclusion on the ground that it had been accrued but not receivedand the assessee had been adopting mercantile system of account.However, the Commissioner of Income Tax [Appeals] had dealt withthis issue as though the claim of the assessee was that the"interest had accrued but had not become due" for the relevantyear. 5.The learned Sr.Standing Counsel submitted that even assumingwithout admitting that this was a case where the interest had beencalculated on an accrued but not received basis and the accountinghad to be one on due basis, still if the interest had become due ason 31[st] March of the previous year, then it had to be treated asincome of that year and merely because he gets the right to receivethe interest on the following day viz., 1[st] of April, it cannot besaid that interest does not form part of the income of the previousyear. The learned Sr.Standing Counsel also submitted that though in291 ITC 137 Commissioner of Income Tax, Madurai Vs. TamilnaduMercantile Bank Ltd., Tuticorin., similar issue was raised, thatcase dealt with interest on securities and the same may bedistinguished. 6.The learned Counsel for the assessee would however submitthat there was no change in the stand of the assessee with regardto the interest received right from the beginning and even beforethe assessing officer, this had been treated as income accrued "butnot due" and the learned Counsel referred to the relevant page inthe typed set of papers. Therefore, the learned Counsel submittedthat the previous order does not warrant interference especiallybecause it has been decided in favour of the assessee in 291 ITC137 (cited supra). 7.We have gone through the materials on record. The AssessingOfficer had rejected the claim for exclusion of interest accrued.The assessing officer also dealt with the increased income on theprinciple of accrual and confirmed the assessment order. TheTribunal however, rightly held, in our opinion, that the opinion ofthe Commissioner of Income Tax that once it has accrued, it shouldbe included as income is not correct since the very term "accruedbut not due" would show that right to receive the interest had notarisen to the assessee and the interest was receivable only fromthe 1[st] of April of the next year. In fact, an identical issue cameup before this Court in 291 ITR 137 [cited supra]. In that casealso, the assessee had adopted mercantile system of accounting asin this case and it was contended before the Bench that "even underSection 145 of the Act, method of accounting on due basis isrecognised. The assessee is following mercantile system and so heis entitled to the benefit of Section 145 of the Act." 8.The Division Bench of of this Court after going through the https://hcservices.ecourts.gov.in/hcservices/ relevant statutory provisions viz., Sections 18 and 147 of theIncome Tax Act, held as follows :- 8.The Division Bench of of this Court after going through the https://hcservices.ecourts.gov.in/hcservices/ relevant statutory provisions viz., Sections 18 and 147 of theIncome Tax Act, held as follows :- "In view of the deletion of the Section 18of the Act with effect from April 1, 1989, thethird proviso to section 145(1) was insertedwith effect from April 1, 1989, which is asaving clause. Although the amendment was witheffect from April 1, 1989, it clearly providesthat any income by way of interest onsecurities shall be chargeable to tax as theincome of the previous year in which suchinterest is due to the assessee only where nomethod of accounting is regularly employed bythe assessee. In other words, if the assesseeis maintaining cash system of accounting, theaforesaid proviso would not apply. Thelegislative intent is that when the assessee ismaintaining the cash system of accounting,income by way of interest on securities willhave to be charged to tax only when theassessee actually receives the interest and noton the date on which interest on suchsecurities might become due.....In the instant case, there is no change inthe method of accounting by the assessee. Theassessing Officer accepted the method ofaccounting followed by the assessee during theearlier assessment years, but, without anychange in circumstance, changed the method ofassessment during the financial years inquestion, which in our considered opinion, isunsustainable. As already observed, eventhough Section 18 of the Act was deleted, theassessee is taxable for interest on securitiesonly on specified dates when it becomes due forpayment, in view of third proviso to Section145(1) of the Act, which was in force duringthe relevant assessment years, as well as inthe light of the well settled principles laiddown in the catena of decisions referred toabove..... In the result, these appeals are dismissedanswering the substantial question of lawraised against the Revenue and in favour of theassessee. No costs. Therefore, this question is decided against the Revenue and infavour of the assessee. In the result, these appeals are dismissedanswering the substantial question of lawraised against the Revenue and in favour of theassessee. No costs. Therefore, this question is decided against the Revenue and infavour of the assessee. Question of law No.4 :9.Mrs.Pushya Sitaraman, learned Senior Standing Counselappearing on behalf of the Revenue referred to Rockweld ElectrodesIndia Limited vs. C.I.T., (1990) 185 I.T.R. 63 (Mds) where,paragraph 11 and 20 read as follows :- 11.The facts, therefore, remain that forthe assessment year 1971-72 income for theperiod January 1, 1969, to May 31, 1970, wasassessed, for the assessment year 1972-73income from June 1, 1970, to May 31, 1971 wasassessed and for the year 1973-74 the incomewhich was brought to tax was of the previousyear starting from June 1, 1971, and endingwith May 31, 1972. Therefore, no assessment wasmade for the year 1970-71 due to change allowedin the previous year. That is because the lastdate of the changed previous year did not fallwithin the financial year preceding theassessment year 1970-71. So far as the presentcase is concerned, the initial assessment yearis 1968-69 and the four assessment yearsimmediately succeeding the initial assessmentyears are 1969-70, 1970-71, 1971-72 and 1972-73. The relief contemplated under Section 80J(2) came to an end with the assessment year1972-73. Therefore, the assessment year 1973-74falls outside the scope of section 80J(2) ofthe Act. Hence, the assessee is not entitled tothe relief asked for under Section 80J(2) inthe assessment year 1973-74. The words"immediately succeeding assessment years"appear in several other provisions such asSection 72(3), etc. Under such circumstances,the Tribunal rightly pointed out that theconcept of "assessment year" has got to beunderstood in the manner prescribed under theprovisions of the Act and not with reference toa particular assessee as canvassed for bylearned Counsel appearing for the assessee.....20.Thus it emerges that whenever theassessee is permitted to get relief for aspecified number of consecutive assessmentyears, the Courts have consistently held thatthe assessment years should be taken in naturalsequence. In the present case, the assessee gotrelief under Section 80J(2) of the Act for theassessment year 1968-69 and, therefore, thesubsequent four assessment years are naturally 1969-70, 1970-71, 1971-72 and 1972-73. Thus,the last assessment year for which the assesseecan get deduction under Section 80J(2) of theAct would be only the assessment year 1972-73.In the instant case, the assessee changed itsaccounting year from December 31, 1969, to May31, 1970, with the result there was no taxableincome for the assessment year 1970-71. But itis not necessary for us to consider in thiscase whether in any of the four subsequentassessment years the assessee had taxableincome or he was assessed to tax or not. Hence,the Tribunal was correct in upholding the orderpassed by the authorities below on this point.In that view of the matter, we answer thequestion referred to us in the affirmative andagainst the assessee. The assessee is directedto pay the cost to the Revenue. Counsel's feeis fixed at Rs.500." 10.While the Assessing Officer and the Commissioner (I.T.Appeals) have given their findings on the basis of RockweldElectrodes' case, the Appellate Tribunal opted to differ but didnot give reasons why it differed, apart from stating so. 11.Though the learned Counsel appearing for the petitionerwould stress that the language of Section 80 HH differs from 80J,and the Judgments relied on by the learned Counsel for the RevenueMs.Pushya Sitharaman, all related to cases arising out of 80J andin 80J, the words "immediately succeeding" are used. We reallythink that the basis on which decisions were made did not turn onthe usage of the words immediately succeeding but the constructionof the words "assessment year". 10.While the Assessing Officer and the Commissioner (I.T.Appeals) have given their findings on the basis of RockweldElectrodes' case, the Appellate Tribunal opted to differ but didnot give reasons why it differed, apart from stating so. 11.Though the learned Counsel appearing for the petitionerwould stress that the language of Section 80 HH differs from 80J,and the Judgments relied on by the learned Counsel for the RevenueMs.Pushya Sitharaman, all related to cases arising out of 80J andin 80J, the words "immediately succeeding" are used. We reallythink that the basis on which decisions were made did not turn onthe usage of the words immediately succeeding but the constructionof the words "assessment year". 12.The assessee commenced a new industrial undertaking formanufacture of vacuum cleaners during the previous year ending31.12.1981, relevant to assessment year 1982-83. The initial yearfor deduction under Section 80HH in respect of revenue i.e. was1982-83. The assessee is allowed deduction for 10 assessment years.There was a change in the accounting year from December to June.Therefore, the assessment year 1985-86 covered the period from01.01.1983 to 30.06.1984. There was no assessment for theassessment year 1984-85. So the assessee claimed his 10[th] year was1992-93. According to the revenue the natural sequence ofassessment years should be followed and if so, the 10[th] year was1991-92. 13.In 229 ITR 701, Kar mobiles ltd. v. Commissioner of IncomeTax, the held thus :-"The fact that the assessee had changed https://hcservices.ecourts.gov.in/hcservices/ with effect from April 1, 1976, the previousyear or the financial year to the year endingSeptember 30, and the previous year for theassessment year 1978-79 was consequently fromApril 1, 1976 to September 30, 1977, and therewas no previous year for the assessment year1977-78 will not advance the case of theassessee for claiming relief under Section 80Jfor the assessment year 1980-81 also. It wasonly because there was no previous year for theassessment year 1977-78 and consequently therewas no computation period for the purpose ofrelief under Section 80J for that assessmentyear, that the assessee could not get anyrelief under Section 80J for the assessmentyear 1977-78. The said position cannot make theassessee entitled to get the relief underSection 80J for the assessment year 1980-81." 14.In 237 ITR 202 [Premier Cable Co. Ltd. v. Commissioner ofIncome Tax.]., the Supreme Court has clearly explained how thewords "assessment year" should be understood. In that case also,the assessee had followed mercantile system of accounting in theprevious year relevant to the assessment year 1967-68. By itsletter dated April 21st, 1975, the assessee had requested that itsaccounting year be changed from the yea ending March 31 to the yearending September, 30. The Supreme Court held thus : "9.We find it difficult to agree. Section2(9) defines assessment year to be the periodof 12 months commencing on the first day ofApril every year. It is a standard period of 12months commencing on 1st April of every year.It does not depend upon one or the otherassessee and whether or not he had a previousyear relevant to a particular assessment year.It is as invariable as the calendar year. The“assessment years” mentioned in Sections 33 and80-J must be read in this light. The unabsorbeddevelopment rebate under Section 33 and theunabsorbed deduction under Section 80-J may becarried forward only for the 8 and 4 assessmentyears respectively that follow the assessmentyear relevant to the previous year in which thesaid development rebate and deduction werefirst earned. The fact that in the instantcase, the assessee did not have a previous yearrelevant to a particular assessment year thatfell within these spans of 8 and 4 assessmentyears respectively is of no consequence to the calculation of the periods for which theaforesaid development rebate and deduction canbe carried forward." 15.It was argued before the Supreme Court that under theprovisions of Section 4, the charge for the levy of income tax wasimposed on a person in respect to his previous year and if anassessee had no particular previous year, then, there was noassessment year which could be related to and since the assesseehad no previous year relevant to the assessment year 1975-76,calculating the period of 8 and 4 assessment years respectively forthe carry-forward of the aforesaid unabsorbed development rebateand deduction, Assessment Year 1975-76 was not to be considered andthese periods had to extend to Assessment Year 1976-77. 16.Therefore, it is clear from the above that period of 12months commence from the first day of April every year, which isthe assessment year as defined under Section 2(9), would not dependupon one or the other assessee and whether or not he had a previousyear relevant to a particular assessment year. It is as invariableas the calendar year and the assessment year mentioned in Sec.80HHmust be construed in the same manner as the Supreme Court has heldin the above Judgment. 17.Though the assessee in the present case had changed theprevious year and contended that there is no assessment for theyear 1984-1985, it would not in any way change the manner in whichthe ten assessment years should be calculated. Naturally, sequenceof ten years must be followed. Therefore, the question of lawraised by the revenue is answered in favour of the revenue. Thistax case is allowed. No costs. Sd/Asst.Registrar /true copy/ ab/tar To 1. THE ASSISTANT REGISTRAR,INCOME TAX APPELLATE TRIBUNAL,'A' BENCH, III FLOOR , RAJAJI BHAVAN,BESANT NAGAR, MADRAS 90. 2. THE COMMISSIONER OFINCOME TAX-I, CHENNAI.3. THE DEPUTY COMMISSIONER OFINCOME TAX, SPECIAL RANGE II,MADRAS.3. THE DEPUTY COMMISSIONER OFINCOME TAX, SPECIAL RANGE II,MADRAS4. THE COMMISSIONER OF INCOMETAX (APPEASL) VII, CHENNAI.+1cc to M/s.Pushya Sitaraman, Advocate Sr 62742NSM (CO)km/29.12.T.C.(A) Nos.495 & 496/2004