In K.a.chowdary V Commissioner Of Income Tax[[1]]And Commissioner[2]Of Income Tax V B.chinnaiah, The Question Whether An Employee v. Rajesh Jhaveri Stock Brokers P. Ltd.,[[3]]Wherein It Was Held As Under

THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE B.N.RAO NALLA R.C.NOs.15 AND 108 OF 2000 COMMON ORDER:(Per the Hon’ble Sri Justice V.V.S.Rao) As the question referred in both the Referred Cases iscommon, they are being disposed of by this common order.Butfor the sake of convenience, the facts in RC.No.15 of 2000 aretaken into consideration. This reference is made by the Income Tax AppellateTribunal, Hyderabad Bench ‘A’, Hyderabad, in obedience to theorder of this Court dated 04.02.1999 in ITC.No.78 of 1998 madeunder Section 256(2) of the Income Tax Act, 1961 (the Act). The respondent (hereafter, the assessee) was working as adevelopment officer with LIC of India.In his return of income for-the assessment year 19931994, he claimed deduction of 40% ofthe incentive bonus earned by him towards expenses for earningthe same.The return was processed under Section 143(1)(a) ofthe Act.While doing so, the Assessing Officer disallowed thededuction.The appeal by the assessee before the Commissionerof Income Tax (Appeals) was dismissed.In his further appeal, theTribunal held that the question whether 40% incentive bonus canbe allowed as deduction is highly debatable and therefore, theAssessing Officer while processing the return, could not havemade an adjustment under Section 143(1)(a) of the Act.Beingaggrieved, the Revenue filed R.A.No.138/Hyd/97 under Section256(1) of the Act seeking reference of the following questions to the opinion of this Court. 1.Whether on the facts and in the circumstances of thecase, the ITAT was correct in law in holding that the net ofincentive bonus alone is to be taken as salary deductingthe expenditure incurred for earning the incentive bonus atcase, the ITAT was correct in law in holding that the net ofincentive bonus alone is to be taken as salary deductingthe expenditure incurred for earning the incentive bonus at the starting point itself under Section 15 of the IT Act. 2.Whether on the facts and in the circumstances of thecase, the ITAT was correct in law in holding that thoughthe A.P. High Court in the case of B.Chinnaiah & Others(214 ITR 368) impliedly rejected the contention that 40%of incentive bonus should be allowed as deduction, it wasnot available to the Assessing Officer as on the date ofpassing the intimation under sec.143(1)(a) and as suchthe Assessing Officer was not correct in disallowing 40%of incentive bonus claimed as deduction.case, the ITAT was correct in law in holding that thoughthe A.P. High Court in the case of B.Chinnaiah & Others(214 ITR 368) impliedly rejected the contention that 40%of incentive bonus should be allowed as deduction, it wasnot available to the Assessing Officer as on the date ofpassing the intimation under sec.143(1)(a) and as suchthe Assessing Officer was not correct in disallowing 40%of incentive bonus claimed as deduction. The same were rejected.Thereafter, the Revenue filed anapplication under Section 256(2) of the Act in ITC.No.78 of 1998,when this Court directed the appellate Tribunal to refer thequestion. The Tribunal referred the question, which is as below.“Whether on the facts and in the circumstances of the case,the ITAT was correct in law in holding that the claim ofdeduction of expenses out of incentive bonus is a highlydebatable issue and as such the deduction of 40% ofincentive bonus claimed by the assessee can be disallowedunder clause (iii) of the first proviso under S.143(1)(a) of theIncome Tax Act?” After perusing the application of the Revenue under Section256(1) of the Act being R.A.No.138/Hyd/97, especially thequestion they sought to refer to this Court as extractedhereinabove, we reframe the question referred to this Court asbelow. The Tribunal referred the question, which is as below.“Whether on the facts and in the circumstances of the case,the ITAT was correct in law in holding that the claim ofdeduction of expenses out of incentive bonus is a highlydebatable issue and as such the deduction of 40% ofincentive bonus claimed by the assessee can be disallowedunder clause (iii) of the first proviso under S.143(1)(a) of theIncome Tax Act?” After perusing the application of the Revenue under Section256(1) of the Act being R.A.No.138/Hyd/97, especially thequestion they sought to refer to this Court as extractedhereinabove, we reframe the question referred to this Court asbelow. “Whether on the facts and in the circumstances of the case,the ITAT was correct in law in holding that the claim ofdeduction of expenses out of incentive bonus is a highlydebatable issue and as such the deduction of 40% ofincentive bonus claimed by the assessee cannot bedisallowed under clause (iii) of the first proviso under S.143(1)(a) of the Income Tax Act?” There is no dispute that in view of the decision of this Court in K.A.Chowdary v Commissioner of Income Tax[[1]]and Commissioner[2]of Income Tax v B.Chinnaiah, the question whether an employee, who received incentive bonus can claim deduction of 40% towardsexpenses was highly debatable. Therefore, while processing thereturn, the Assessing Officer could not have made anyadjustments. This view is also supported by the decision of theSupreme Court in Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd.,[[3]]wherein it was held as under. “What were permissible under the first proviso tosection 143(1)(a) to be adjusted were, (i) only apparentarithmetical errors in the return, accounts or documentsaccompanying the return, (ii) loss carried forward, deduction,allowance of relief, which was prima facie admissible on thebasis of information available in the return but not claimed inthe return and similarly (iii) those claims which were on thebasis of the information available in the return, prima facieinadmissible, were to be rectified/allowed/disallowed. Whatwas permissible was correction of errors apparent on thebasis of the documents accompanying the return. TheAssessing Officer had no authority to make adjustmentsor adjudicate upon any debatable issues. In other words,the Assessing Officer had no power to go behind the return,accounts or documents, either in allowing or in disallowingdeductions, allowance or relief.” (emphasis supplied) The above view was reiterated in Kvaverner John Brown [4]wherein it was held as under. Engg. (India) P. Ltd. V. Asst. CIT “One of the main conditions stipulated by way of thefirst proviso to section 143(1)(a), as it stood during therelevant time, referred to prima facie adjustments. The firstproviso permitted the Department to make adjustments in theincome or loss declared in the return of cases of arithmeticalerrors or in cases where any loss carried forward ordeduction or allowance which on the basis of informationavailable in such return was prima facie admissible but whichwas not claimed in the return or in cases where any losscarried forward, or deduction or allowance claimed in thereturn which on the basis of information available in suchreturn was prima facie inadmissible. In the present case,therefore, when there were conflicting judgments oninterpretation of section 80-O, in our view, prima facie adjustments contemplatedunder section 143(1)(a) was not applicable and, therefore,consequently the appellant was not liable to pay additional taxunder section 143 (1A) of the 1961 Act.” In view of the said legal position, we answer the question inthe affirmative in favour of the assessee and against the Revenueand both the Referred Cases shall stand disposed of accordinglywithout any order as to costs. _______________ (V.V.S.RAO, J) 28[th] December 2011RRB ____________________ (B.N.RAO NALLA, J) [1](1990) 183 ITR 29(1990) 183 ITR 29 [2](1995) 214 ITR 368(1995) 214 ITR 368 [3](2007) 291 ITR 5090 (SC)(2007) 291 ITR 5090 (SC) 80-O, in our view, prima facie adjustments contemplatedunder section 143(1)(a) was not applicable and, therefore,consequently the appellant was not liable to pay additional taxunder section 143 (1A) of the 1961 Act.” In view of the said legal position, we answer the question inthe affirmative in favour of the assessee and against the Revenueand both the Referred Cases shall stand disposed of accordinglywithout any order as to costs. _______________ (V.V.S.RAO, J) 28[th] December 2011RRB ____________________ (B.N.RAO NALLA, J) [1](1990) 183 ITR 29(1990) 183 ITR 29 [2](1995) 214 ITR 368(1995) 214 ITR 368 [3](2007) 291 ITR 5090 (SC)(2007) 291 ITR 5090 (SC) [4](2008) 305 ITR 103 (SC)(2008) 305 ITR 103 (SC)