M/S. Tamilnadu Magnesite Ltd v. The Deputy Commissioner Of Income Tax Special Range, Salem

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 3.7.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A) No.903 of 2007 M/s. Tamilnadu Magnesite Ltd.5/53, Omalur Main RoadJagir Ammapalayam, Salem. ..Appellant Vs...Respondent The Deputy Commissioner of Income TaxSpecial Range, Salem. Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras 'D' Bench dated3.7.2006 in ITA No.1854/Mds/95, for the assessment year 1994-1995 againstthe order of the Commissioner of Income Tax (Appeals) Coimbatore, made inIT Appeal No.870-C/94-95 dated 02.08.1995 against the order of the DeputyCommissioner of Income-Tax, Special Range, Salem in PAN.47-053-CX 006adated 12.01.95 For Appellant:Mr.J.BalachanderFor Mr.S.Sridhar J U D G M E N T (Delivered by P.D.DINAKARAN, J.) The assessee is the appellant and the appeal is directed against theorder of the Income Tax Appellate Tribunal, Chennai dated 3.7.2006 made inITA No.1854/Mds/95, raising the substantial questions of law, viz. (a) Whether the Tribunal is correct in confirming the validityof prima facie adjustment made under section 143(1)(a) of theAct in respect of bonus provision of Rs.33,35,984/-? https://hcservices.ecourts.gov.in/hcservices/ (b) Whether the Tribunal is correct in not considering the scopeof the powers of the respondent in making prima facie adjustmentin the computation of taxable total income while passing theorder under section 143(1)(a) of the Act? 2.1. The relevant assessment year is 1994-95. The appellant filedits return on 24.11.1994 for the year ending on 31.3.1994 showing a lossof Rs.4,52,09,221/- and in the tax audit report file in Form No.3 CD withreturn of income, bonus of Rs.33,35,994/- was provided for, which had notbeen paid till 23.9.1994. 2.2. Challenging the said adjustment and levy of additional taxthereon, the assessee preferred an appeal before the Commissioner ofIncome Tax (Appeals) contending that the bonus payable to the employee wasan expenditure incurred and laid down wholly and exclusively for thepurpose of and in the course of the business carried on. It was alsocontended that the balance sheet prepared for the said assessment year wastrue and correct. The Commissioner, by order dated 2.8.1995, held thatthe provisions of Section 43B of the Act override the provisions ofSection 36(1) of the Act and accordingly, the disallowance was properlymade and it was a prima facie adjustment made under Section 143(1) of theAct. 2.3. Aggrieved by the said order dated 2.8.1995, the assessee againpreferred an appeal before the Tribunal, which, by order dated 3.7.2006held that the Assessing Officer had rightly added back the bonus provisionof Rs.33,35,984/-, as the assessee had not paid the amount within the duedate for filing the returns and accordingly, confirmed the order of theCommissioner that Section 43B of the Act override Section 36(1) of theAct, in view of the non obstante clause found in Section 43B of the Actand accordingly, disallowance of the provisions for bonus was properlymade. 2.4. Infuriated by the order of the Tribunal, the assessee haspreferred the above appeal raising the substantial questions of lawaforementioned. 3. Both the substantial questions of law raised by the assesseerevolves on the question of the scope of power of the respondents inmaking the prima facie adjustment while computing the taxable income byexercising the power conferred under Section 143(1) of the Act,particularly in a case where it attracts Sections 36(1) and 43B of theAct, which read as under. Section 36(1): 36. Other deductions.--(1) The deductions provided for in thefollowing clauses shall be allowed in respect of the mattersdealt with therein, in computing the income referred to insection 28-- 2.4. Infuriated by the order of the Tribunal, the assessee haspreferred the above appeal raising the substantial questions of lawaforementioned. 3. Both the substantial questions of law raised by the assesseerevolves on the question of the scope of power of the respondents inmaking the prima facie adjustment while computing the taxable income byexercising the power conferred under Section 143(1) of the Act,particularly in a case where it attracts Sections 36(1) and 43B of theAct, which read as under. Section 36(1): 36. Other deductions.--(1) The deductions provided for in thefollowing clauses shall be allowed in respect of the mattersdealt with therein, in computing the income referred to insection 28-- (i) the amount of any premium paid in respect of insuranceagainst risk of damage or destruction of stocks or stores usedfor the purposes of the business or profession; (ia) the amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance onthe life of the cattle owned by a member of a co-operativesociety, being a primary society engaged in supplying milk raisedby its member to such federal milk co-operative society; (ib) the amount of any premium paid by cheque by theassessee as an employer to effect or to keep in force aninsurance on the health of his employees under a scheme framed inthis behalf by the General Insurance Corporation of India formedunder section 9 of the General Insurance Business(Nationalisation) Act, 1972 (57 of 1972), and approved by theCentral Government; (ii) any sum paid to an employee as bonus or commission forservices rendered, where such sum would not have been payable tohim as profits or dividend if it had not been paid as bonus orcommission: (iia) a sum equal to one and one-third times the amount ofthe expenditure incurred on payment of any salary for any periodof employment before the 1st day of March, 1984, to an employeewho, as at the end of the previous year,-- (a) is totally blind, or (b) is subject to or suffers from a permanent physicaldisability (other than blindness) which has the effect ofreducing substantially his capacity to engage in a gainfulemployment or occupation: Provided that the assessee produces before the Assessing Officer,in respect of the first assessment year for which deduction isclaimed in relation to each such employee under this clause,-- https://hcservices.ecourts.gov.in/hcservices/ (i) in a case referred to in sub-clause (a), a certificateas to his total blindness from a registered medical practitionerbeing an oculist ; and (ii) in a case referred to in sub-clause (b), a certificateas to the permanent physical disability referred to in the saidsub-clause from a registered medical practitioner: Provided further that nothing contained in this clause shallapply in the case of an employee whose income in the previousyear chargeable under the head "Salaries" exceeds twenty thousandrupees. Explanation 1.--In this clause, "salary" includes the pay,allowances, bonus or commission payable monthly or otherwise. Explanation 2.--For the removal of doubts, it is hereby declaredthat where a deduction under this clause is allowed for anyassessment year in respect of any expenditure, deduction shallnot be allowed in respect of such expenditure under any otherprovision of this Act for the same or any other assessment year ; (iii) the amount of the interest paid in respect of capitalborrowed for the purposes of the business or profession; Explanation.--Recurring subscriptions paid periodically byshareholders or subscribers in Mutual Benefit Societies whichfulfil such conditions as may be prescribed, shall be deemed tobe capital borrowed within the meaning of this clause; Explanation 1.--In this clause, "salary" includes the pay,allowances, bonus or commission payable monthly or otherwise. Explanation 2.--For the removal of doubts, it is hereby declaredthat where a deduction under this clause is allowed for anyassessment year in respect of any expenditure, deduction shallnot be allowed in respect of such expenditure under any otherprovision of this Act for the same or any other assessment year ; (iii) the amount of the interest paid in respect of capitalborrowed for the purposes of the business or profession; Explanation.--Recurring subscriptions paid periodically byshareholders or subscribers in Mutual Benefit Societies whichfulfil such conditions as may be prescribed, shall be deemed tobe capital borrowed within the meaning of this clause; (iv) any sum paid by the assessee as an employer by way ofcontribution towards a recognised provident fund or an approvedsuperannuation fund, subject to such limits as may be prescribedfor the purpose of recognising the provident fund or approvingthe superannuation fund, as the case may be; and subject to suchconditions as the Board may think fit to specify in cases wherethe contributions are not in the nature of annual contributionsof fixed amounts or annual contributions fixed on some definitebasis by reference to the income chargeable under the head "Salaries " or to the contributions or to the number of members ofthe fund; (v) any sum paid by the assessee as an employer by way ofcontribution towards an approved gratuity fund created by him forthe exclusive benefit of his employees under an irrevocabletrust; (va) any sum received by the assessee from any of hisemployees to which the provisions of sub-clause (x) of clause(24) of section 2 apply, if such sum is credited by the assesseeto the employee's account in the relevant fund or funds on orbefore the due date. Explanation.--For the purposes of this clause, "due date" meansthe date by which the assessee is required as an employer tocredit an employee's contribution to the employee's account inthe relevant fund under any Act, rule, order or notificationissued thereunder or under any standing order, award, contract ofservice or otherwise. (vi) in respect of animals which have been used for thepurposes of the business or profession otherwise than as stock-in-trade and have died or become permanently useless for suchpurposes, the difference between the actual cost to the assesseeof the animals and the amount, if any, realised in respect of thecarcasses of animals; (vii) subject to the provisions of sub-section (2), theamount of any bad debt or part thereof, which is written off asirrecoverable in the accounts of the assessee for the previousyear: Provided that in the case of an assessee to which clause(viia) applies, the amount of the deduction relating to any suchdebt or part thereof shall be limited to the amount by which suchdebt or part thereof exceeds the credit balance in the provisionfor bad and doubtful debts account made under that clause; Explanation.- For the purposes of this clause, any bad debtor part thereof written off as ... (viia) in respect of any provision for bad and doubtfuldebts made by-- (a) a scheduled bank not being a bank approved by theCentral Government for the purposes of clause (viiia) or a bankincorporated by or under the laws of a country outside India or anon-scheduled bank, an amount not exceeding five per cent. of thetotal income (computed before making any deduction under thisclause and Chapter VI-A) and an amount not exceeding two percent. of the aggregate average advances made by the ruralbranches of such bank computed in the prescribed manner; (b) a bank, being a bank incorporated by or under thelaws of a country outside India, an amount not exceeding five percent. of the total income (computed before making any deductionunder this clause and Chapter VIA). (viia) in respect of any provision for bad and doubtfuldebts made by-- (a) a scheduled bank not being a bank approved by theCentral Government for the purposes of clause (viiia) or a bankincorporated by or under the laws of a country outside India or anon-scheduled bank, an amount not exceeding five per cent. of thetotal income (computed before making any deduction under thisclause and Chapter VI-A) and an amount not exceeding two percent. of the aggregate average advances made by the ruralbranches of such bank computed in the prescribed manner; (b) a bank, being a bank incorporated by or under thelaws of a country outside India, an amount not exceeding five percent. of the total income (computed before making any deductionunder this clause and Chapter VIA). (c) a public financial institution or a State FinanicalCorporation or a State Industrial Investment Corporation, anamount not exceeding five per cent. of the total income (computedbefore making any deduction under this clause and Chapter VI-A). Explanation.--For the purposes of this clause,-- (i) "non-scheduled bank means a banking company as definedin clause (c) of section 5 of the Banking Regulation Act, 1949(10 of 1949), which is not a scheduled bank ; (ia) "rural branch" means a branch of a scheduled bank or anon-scheduled bank situated in a place which has a population ofnot more than ten thousand according to the last preceding censusof which the relevant figures have been published before thefirst day of the previous year ; (ii) "scheduled bank" means the State Bank of Indiaconstituted under the State Bank of India Act, 1955 (23 of 1955),a subsidiary bank as defined in the State Bank of India(Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding newbank constituted under section 3 of the Banking Companies(Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970),or under section 3 of the Banking Companies (Acquisition andTransfer of Undertakings) Act, 1980 (40 of 1980), or any otherbank being a bank included in the Second Schedule to the ReserveBank of India Act, 1934 (2 of 1934), but does not include a co-operative bank ; (iii) "public Financial Institution" shall have the meaningassigned to it in section 4A of the Companies Act, 1956 (1 of1956) ; (iv) "State Financial Corporation" means a financialcorporation established under section 3 or section 3A or aninstitution notified under section 46 of the State FinancialCorporation Act, 1951 (63 of 1951) ; (v) "State Industrial Investment Corporation" means aGovernment company within the meaning of section 617 of theCompanies Act, 1956 (1 of 1956), engaged in the business ofproviding long-term finance for industrial projects and approvedby the Central Government under clause (viii) of this sub-section; https://hcservices.ecourts.gov.in/hcservices/ (viii) in respect of any special reserve created by afinancial corporation which is engaged in providing long-termfinance for industrial or agricultural development in India or bya public company formed and registered in India with the mainobject of carrying on the business of providing long-term financefor construction or purchase of houses in India for residentialpurposes, an amount not exceeding forty per cent. of the totalincome (computed before making any deduction under this clauseand Chapter VI-A) carried to such reserve account: Provided that the corporation or, as the case may be, thecompany is for the time being approved by the Central Governmentfor the purposes of this clause: Provided further that where the aggregate of the amountscarried to such reserve account from time to time exceeds twicethe amount of the paid-up share capital (excluding the amountscapitalised from reserves) of the corporation, or, as the casemay be, the company no allowance under this clause shall be madein respect of such excess ; Explanation.--In this clause,-- Provided that the corporation or, as the case may be, thecompany is for the time being approved by the Central Governmentfor the purposes of this clause: Provided further that where the aggregate of the amountscarried to such reserve account from time to time exceeds twicethe amount of the paid-up share capital (excluding the amountscapitalised from reserves) of the corporation, or, as the casemay be, the company no allowance under this clause shall be madein respect of such excess ; Explanation.--In this clause,-- (a) "financial corporation" shall include a public companyand a Government company ; (b) "public company" shall have the meaning assigned to itin section 3 of the Companies Act, 1956 (1 of 1956) ; (c) "Government company" shall have the meaning assigned toit in section 617 of the Companies Act, 1956 (1 of 1956). (viiia) in respect of any special reserve created by ascheduled bank (other than a bank incorporated by or under thelaws of a country outside India) which is engaged in bankingoperations outside India, an amount not exceeding forty per cent.of the total income (computed before making any deduction underthis clause and Chapter VI-A) carried to such reserve account: Provided that, having regard to its capital structure, the extentof its banking operations outside India, its need for resourcesfor such operations outside India and other relevant factors, thebank is, for the time being, approved by the Central Governmentfor the purposes of this clause. Explanation.--For the purposes of this clause "scheduled bank",has the same meaning as in clause (ii) of the Explanation toclause (viia) ; https://hcservices.ecourts.gov.in/hcservices/ (ix) any expenditure bona fide incurred by a company for thepurpose of promoting family planning amongst its employees: Provided that where such expenditure or any part thereof is of acapital nature, one-fifth of such expenditure shall be deductedfor the previous year in which it was incurred; and the balancethereof shall be deducted in equal instalments for each of thefour immediately succeeding previous years: Provided further that the provisions of sub-section (2) ofsection 32 and of sub-section (2) of section 72 shall apply inrelation to deductions allowable under this clause as they applyin relation to deductions allowable in respect of depreciation: Provided further that the provisions of clauses (ii), (iii), (iv)and (v) of sub-section (2) and sub-section (5) of section 35, ofsub-section (3) of section 41 and Explanation 1 to clause (1) ofsection 43 shall, so far as may be, apply in relation to an assetrepresenting expenditure of a capital nature for the purposes ofpromoting family planning as they apply in relation to an assetrepresenting expenditure of a capital nature on scientificresearch. (x) any sum paid by a public financial institution by way ofcontribution towards any fund specified under clause (23E) ofsection 10. Explanation.--For the purposes of this clause, "public financialinstitutions" shall have the meaning assigned to it in section 4Aof the Companies Act, 1956 (1 of 1956). (2) ... Section 43B: Certain deductions to be only on actual payment.--Notwithstandinganything contained in any other provision of this Act, adeduction otherwise allowable under this Act in respect of-- (a) any sum payable by the assessee by way of tax, duty,cess or fee, by whatever name called, under any law for the timebeing in force, or (b) any sum payable by the assessee as an employer by way ofcontribution to any provident fund or superannuation fund orgratuity fund or any other fund for the welfare of employee, or (c) any sum referred to in clause (ii) of sub-section (1) ofsection 36, or (d) any sum payable by the assessee as interest on any loanor borrowing from any public financial institution or a Statefinancial corporation or a State industrial investmentcorporation, in accordance with the terms and conditions of theagreement governing such loan or borrowing, (a) any sum payable by the assessee by way of tax, duty,cess or fee, by whatever name called, under any law for the timebeing in force, or (b) any sum payable by the assessee as an employer by way ofcontribution to any provident fund or superannuation fund orgratuity fund or any other fund for the welfare of employee, or (c) any sum referred to in clause (ii) of sub-section (1) ofsection 36, or (d) any sum payable by the assessee as interest on any loanor borrowing from any public financial institution or a Statefinancial corporation or a State industrial investmentcorporation, in accordance with the terms and conditions of theagreement governing such loan or borrowing, shall be allowed (irrespective of the previous year in which theliability to pay such sum was incurred by the assessee accordingto the method of accounting regularly employed by him) only incomputing the income referred to in section 28 of that previousyear in which such sum is actually paid by him. Provided that nothing contained in this section shall apply inrelation to any sum referred to in clause (a) or clause (c) orclause (d) which is actually paid by the assessee on or beforethe due date applicable in his case for furnishing the return ofincome under sub-section (1) of section 139 in respect of theprevious year in which the liability to pay such sum was incurredas aforesaid and the evidence of such payment is furnished by theassessee along with such return: Provided further that no deduction shall, in respect of any sumreferred to in clause (b), be allowed unless such sum hasactually been paid in cash or by issue of a cheque or draft or byany other mode on or before the due date as defined in theExplanation below clause (va) of sub-section (1) of section 36,and where such payment has been made otherwise than in cash, thesum has been realised within fifteen days from the due date. Explanation 1.--For the removal of doubts, it is hereby declaredthat where a deduction in respect of any sum referred in clause(a) or clause (b) of this section is allowed in computing theincome referred to in section 28 of the previous year (being aprevious year relevant to the assessment year commencing on the1st day of April, 1983, or any earlier assessment year) in whichthe liability to pay such sum was incurred by the assessee, theassessee shall not be entitled to any deduction under thissection in respect of such sum in computing the income of theprevious year in which the sum is actually paid by him. Explanation 2.--For the purposes of clause (a), as in force atall material times, "any sum payable" means a sum for which theassessee incurred liability in the previous year even though suchsum might not have been payable within that year under therelevant law. Explanation 3.--For the removal of doubts it is hereby declaredthat where a deduction in respect of any sum referred to inclause (c) or clause (d) of this section is allowed in computingthe income referred to in section 28 of the previous year (beinga previous year relevant to the assessment year commencing on the1st day of April, 1988, or any earlier assessment year) in whichthe liability to pay such sum was incurred by the assessee, theassessee shall not be entitled to any deduction under thissection in respect of such sum in computing the income of theprevious year in which the sum is actually paid by him. Explanation 4.--For the purposes of this section, (a) "public financial institutions" shall have the meaningassigned to it in section 4A of the Companies Act, 1956 (1 of1956). (b) "State financial corporation" means a financialcorporation established under section 3 or section 3A or aninstitution notified under section 46 of the State FinancialCorporations Act, 1951 (63 of 1951); Explanation 4.--For the purposes of this section, (a) "public financial institutions" shall have the meaningassigned to it in section 4A of the Companies Act, 1956 (1 of1956). (b) "State financial corporation" means a financialcorporation established under section 3 or section 3A or aninstitution notified under section 46 of the State FinancialCorporations Act, 1951 (63 of 1951); (c) "State industrial investment corporation" means aGovernment company within the meaning of section 617 of theCompanies Act, 1956 (1 of 1956), engaged in the business ofproviding long-term finance for industrial projects and approvedby the Central Government under clause (viii) of sub-section (1)of section 36. 4. There is no dispute as to the position that Section 43B of theAct overrides Section 36(1) of the Act, in view of the non obstante clauseemployed in Section 43B of the Act. If that be so, to decide as to thepower of the respondent for making a prima facie adjustment in thecomputation of taxable total income while passing order under Section 143(1) of the Act, it is apt to refer Section 143(1) of the Act, which readsas under. 143. Assessment.--(1)(a) Where a return has been made undersection 139, or in response to a notice under sub-section (1) ofsection 142,-- (i) if any tax or interest is found due on the basis ofsuch return, after adjustment of any tax deducted at source, anyadvance tax paid and any amount paid otherwise by way of tax orinterest, then, without prejudice to the provisions of sub-section (2), an intimation shall be sent to the assesseespecifying the sum so payable, and such intimation shall bedeemed to be a notice of demand issued under section 156 and allthe provisions of this Act shall apply accordingly; and (ii) if any refund is due on the basis of such return, itshall be granted to the assessee: Provided that in computing the tax or interest payable by, orrefundable to, the assessee, the following adjustments shall bemade in the income or loss declared in the return, namely:-- (i) any arithmetical errors in the return, accounts ordocuments accompanying it shall be rectified; (ii) any loss carried forward, deduction, allowance orrelief, which, on the basis of the information available in suchreturn, accounts or documents, is prima facie admissible butwhich is not claimed in the return, shall be allowed; (iii) any loss carried forward, deduction, allowance orrelief claimed in the return, which, on the basis of theinformation available in such return, accounts or documents, isprima facie inadmissible, shall be disallowed. 5. Clause (iii) of the first proviso to Section 143(1)(a) of the Actenables the respondent for making adjustment in the income or lossdeclared in the return such as any loss carried forward, deduction,allowance or relief claimed in the return, which, on the basis of theinformation available in such return, accounts or documents, is primafacie inadmissible, shall be disallowed. As there is no dispute that theimpugned deduction is inadmissible in view of Section 43B of the Act,which overrides Section 36(1) of the Act, by operation of law, viz. Clause(iii) of first proviso to Section 143(1)(a) of the Act referred to above,we are of the considered opinion that the respondent is well within thepower to make a prima facie adjustment in the computation of taxable totalincome while passing under Section 143(1)(a) of the Act. Hence, we do notsee any substantial question of law, particularly when all the authoritieshave rightly interpreted the power under Section 143(1)(a) of the Act inthe context of Section 43B of the Act which overrides Section 36(1) of theAct. Accordingly, the appeal stands dismissed. kpl To 1. The Assistant Registrar,Income-Tax Appellate TribunalRajaji Bhavan, III Floor,"D" Bench, Besant Nagar, Chennai - 90. 2. The Commissioner of Income Tax (Appeals)Coimbatore. kpl To 1. The Assistant Registrar,Income-Tax Appellate TribunalRajaji Bhavan, III Floor,"D" Bench, Besant Nagar, Chennai - 90. 2. The Commissioner of Income Tax (Appeals)Coimbatore. 3. The Deputy Commissioner of Income Tax,Special Range, Salem. 1 cc To Mr.J.Balachander, Advocate, SR.40386. VRK(CO)RVL 24.07.2007 T.C.(A) No.903 of 2007.