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1.
Scope
The shortest of all the definitions given in the
Income-tax Act, 1961 is that of the word ‘Assessment’. Section 2(8) says,
‘assessment’ includes reassessment. The entire Act aims at determining
the correct income and tax liability as per the provisions of the Act.
There are four types of assessment – viz.
Sec. 143(1) : Summary assessment.
Sec. 143(3) : Scrutiny assessment (including limited scrutiny)
Sec. 144 : Best judgment assessment
Sec. 147 : Re-assessment.
In terms of the definition of sec.
2(40) only two of these – viz., 143(3) and 144 are called ‘regular assessments’.
In this article, I propose to deal with assessment u/s 143(3) particularly
in the context of the recent scenario in the I.T. Department.
2. Recent sensation
For the two consecutive assessment years; viz., A.Y. 1999-2000 and 2000-01,
very minimal number of cases were selected for scrutiny. There was a peaceful
time for the tax-payers and practitioners. In the meanwhile, there was
a ‘re-organisation’ in the Department – in jurisdictions and perhaps in
approach as well. Then suddenly, there was a letter dated 1-10-2002 issued
by CBDT which created a great sensation. Its subject was ‘selection of
additional cases of non-corporate business assessees for scrutiny’. Selection
criteria for scrutiny were decided and in the midst of tension and pressure
of October, a number of notices u/s 143(2) were issued. Diwali festival
in the first week of November became gloomy for tax-practitioners.
[CBDT Instruction No.10/2002 F.No.225/78/2002-ITA
11 dated 1-10-2002].
3. Strange attitude
Frankly, there is nothing much new in the topic that would deserve a special
consideration. However, the very motivation behind selecting the cases
for scrutiny is rather vicious. The letter dated October 1, 2002 of CBDT
refers to the previous Instruction No. 6 / 2002 dated 26-7-2002 for selection
of cases. Then it contains a direction for the monitoring of cases by
Joint Commissioners/Additional Commissioners. It concludes with a note
that assessments in 50% of the cases so selected shall be completed by
the end of January, 2003 so that at least a part of the demand raised
can be collected in the current financial year itself.
The implementation of these directions
is so torturous that the words ‘assessment’ and ‘harassment’ became synonyms.
The editorial of Bombay Chartered Accountants’ Journal of November 2002
describes the present situation very aptly.
4. Selection – Legal requirement
Clause (i) of section 143(2) talks of ‘reason to believe’ on the part
of the Assessing Officer; while clause (ii) mentions that the Assessing
Officer ‘considers it necessary or expedient’ …… Thus, the law requires
application of mind on his part, The question is – ‘can this discretion
be substituted by such instructions of CBDT’? The aforesaid letter talks
of ‘additional’ cases. Thus, the A.O.’s normal discretion will continue.
The Department became rather overzealous
in selecting the cases even for A.Y. 2002-03; so much so that within 2
to 3 days from filing of returns for A.Y. 2002-03, notices under section
143(2) were issued (!)
Although it is difficult to challenge
the legal validity of the notices, it is difficult to reconcile this attitude
of harassment with the overall liberal approach. It is all the more pinching
when the business is faced with severe recession.
5. Past instructions
It is interesting to note the spirit behind a number of instructions issued
by the CBDT in the past which are by and large observed more in breach
than in compliance. For example, –
Circular No. 3 dated 16-1-1942 states
that the assessments should not be influenced by the Budget estimates.
But the present high-handed assessments are exactly to the contrary.
Circular No. 230 dated 27-10-1977 states
that ITO should give each assessee a different timing for hearing. What
is our experience? At the same time, I must mention that we also need
to discipline ourselves in adhering to schedule time of hearing.
CBDT Letter No. 241 / 23 / 70 dated
23-10-1970 states that the orders should be passed (even in complicated
cases) within 14 working days after the date of last hearing.
Instruction No.1395 dated 15-5-1981
– If ITO cannot adhere to the schedule of hearing, the assessee should
be informed by letter or telephone, wherever possible. (!)
Again, Circular No. 3 dated 16-1-1942
states that unless ITO feels it advisable, books of account and vouchers
etc. should not be called for in case of companies where accounts have
been audited. In practice, what is the value attached to the tax-audit
reports?
6. Case Laws on Attitudes
Provisions of the Act should be applied in a humane and considerate manner
– and not with ‘an evil eye and an unequal hand’: Pannalal Binjraj vs.
Union Bank of India (1957) 31 ITR 565(SC).
Authorities must act in a fair and
not partisan manner: CIT vs. Simon Carves Ltd. (1976) 105 ITR 212 (SC).
Officers should not do things in unreasonable
manner: K. Rudra Rao vs. ITO (1958) 34 ITR 216 (A.P.)
7. Technical issues on dection 143
7.1 Thanks to the amendment effective from 1-6-1999,
the scope for litigation on prima facie adjustments have been eliminated
as the old clause (a) of sec. 143(1) has been omitted. The salient features
of summary assessment u/s 143(1) now are:
— No intimation shall be sent after the expiry of one year from the end
of the financial year in which the return is made.
— No demand / no refund, then no intimation. In such case, acknowledgment
of return itself is an ‘intimation’.
7.2 Finance Act, 2002 substituted sub-section (2) of
sec. 143 w.e.f. June 1, 2002. This introduced the concept of ‘Limited
Scrutiny’. Clause (i) of sec. 143(2) contemplates that where the A.O.
has reason to believe that any claim of loss, exemption, deduction, allowance
or relief made in the return is inadmissible, he shall call for the necessary
evidence or particulars in respect of that particular point.
Correspondingly, clause (i) of sub-sec.
(3) empowers him to pass the assessment order determining the sum payable
by the assessee on the basis of such assessment. Does this mean that no
refund can be paid on passing order under clause (i) of 143(3)? What will
happen if on scrutiny, it transpires that even more loss, deduction, etc.
is admissible? Even after reducing the loss etc. there could be a refund.
There was a similar lacuna in the old sub-sec. (3) [presently 143(3)(ii)]
which was rectified. The present difficulty may be overcome by an amendment
or suitable circular.
7.3 Clause (ii) of sub-sec.(2) envisages the normal,
full-fledged scrutiny. The proviso still continues – that no Notice under
this sub-section shall be served on the assessee after the expiry of twelve
months from the end of the month in which the return is furnished. The
question now arises is that having issued the Notice under clause (i),
can the A.O. resort to clause (ii) after the time prescribed in the proviso?
Strictly speaking, the proviso applies to the entire sub-section. However,
A.O. should not switch-over from clause (i) to clause (ii); as otherwise,
the very sanctity of the proviso will be lost.
7.4 There is one more technical point as regards the
proviso to sec.143(2). In case Notice under section 148 has been issued,
the time limit prescribed for the completion of assessment is one year
from the end of the financial year in which the Notice under section 148
was served. The question is as to whether in this situation a separate
notice under section 143(2) is required to be issued within the time prescribed
in the proviso. The practical relevance of this controversy is reduced
since the period of two years for completion of assessment has been reduced
to one year in section 153(2). Strictly speaking the proviso to 143(2)
applies only to the returns filed under section 139 or in response to
a Notice under section 142(1). However, section 148 states that in respect
of the return filed in response to Notice under section 148, the provisions
of the Act shall apply as if such return were a return required to be
furnished under section 139. In order to avoid this controversy, it is
learnt that Notices under section 143(2) are being issued almost simultaneously
with notices u/s 148.
8. It is a popular notion that there cannot be a scrutiny
of returns filed on the basis of presumptive taxation (Sections 44AD,
44AE and 44AF). This is incorrect. The presumption is only as regards
the quantum of business income if the other conditions of the respective
sections are satisfied. However, the other provisions of the Act such
as sections 68, 69, 269SS still continue to apply. Moreover, there could
be income other than business income which can be subjected to scrutiny.
Although, the books of account are not required to be maintained in such
cases, the turnover etc. is required to be proved by necessary evidence.
9. Types of details required
In the current scenario the Assessing Officers are asking for the details
like Cash Flow Statement or Receipts & Payments A/c even where the
turnover is large and regular books of account are maintained and audited.
The question is raised as to whether, having produced the books of account,
can A.O. insist on production of a soft copy. I feel that if the hard
copy is the product of the soft copy there should not be any resistance
in producing the same. However, the A.O. may not be allowed to retain
the same as it would then amount to impounding of the books. It needs
to be examined whether the inclusive definition of books of account given
in section 2(12A) covers only the printouts and not the actual data stored
in floppy, disks, etc. The insistence on production on soft copy may not
be in consonance with the amended definition w.e.f. 1-6-2001.
Secondly, it is pertinent to note that
the proviso to sec. 142 (1) states that in an enquiry before the assessment,
the Assessing Officer shall not require the production of any accounts
relating to a period more than 3 years prior to the previous year. However,
it was held by Calcutta High Court that this restriction of 3 years applies
only in an enquiry prior to the assessment proceedings and not when the
assessment proceedings have begun: Calcutta Chromotype Pvt. Ltd. vs. ITO
(1974) 95 ITR 595 (Cal). Applying the ratio in this judgment, it also
appears that when Assessing Officer intends to commence re-assessment
proceedings u/s 147, he may not be empowered to ask for the production
of books of account beyond three years unless he has issued the notice
u/s 148.
10. Previously, if the assessment was shown to be done
without proper application of mind on the part of the Assessing Officer
or without appreciating the evidence, the CIT (Appeals) had a power to
set aside the assessment. However, with effect from 1-6-2001, CIT (Appeals)
is not empowered to set aside the assessment. On the other hand, the Explanation
to section 251(2) gives him wide powers to consider any matter even if
it is not a subject matter of appeal. Thus in practice, the appellate
proceedings before the CIT (Appeals) virtually amount to an extension
of scrutiny proceedings. Although, its legal validity is difficult to
be questioned, its desirability is very much in doubt.
11. Monitoring vis-à-vis section 144A and section 263
At present the Assessing Officers are not allowed to use their discretion.
The scrutiny assessment are being closely monitored by the Joint/Additional
CIT. Assessee’s representatives are often expected to appear before such
Joint/Additional CIT. Technically one can refuse to do so unless there
is a Notice from these authorities. One may have to take practical decision.
The question is that since these higher authorities are already involved
in the process of assessment, the sanctity of reference u/s 144A is lost.
Moreover, in
such situations, the CIT should be precluded from invoking the powers
of revision u/s 263.
12. Agreed additions
The law does not contemplate what is popularly known as agreed additions.
It also does not find favour with the judicial authorities. The agreed
additions can always be contested in appeal. However, it is relevant to
note the provisions of sub-section (4) of section 249 whereunder, it is
a precondition to pay the undisputed tax before the appeal is admitted.
The department may take a stand that having agreed to the additions in
the assessment, the corresponding tax should also be paid.
13. Special provisions regarding Charitable Trusts
With effect from 1-4-2003, a new dimension has been added to sec. 143(3)
with reference to the assessment of Charitable Trust. The new proviso
to sec. 143(3) now requires the Assessing Officer to expressly verify
and report on the contraventions, if any, of clauses 21, 22B, 23A, 23B,
23C, etc. of section 10. If there is any such contravention, the Assessing
Officer has to ensure that the approvals granted under the respective
clauses or other relevant sections have been rescinded.
14. Time limit for completion of assessments u/s 153
In the normal course as per sub-section 1 of section 153, the order of
assessment u/s 143 or section 144 is required to be passed within two
years from the end of the assessment year in which the income was first
assessable. In terms of sub-section (2), the order of assessment, re-assessment
or re-computation under section 147 is required to be passed within one
year from the end of the financial year in which the Notice under section
148 was served.
15. Conclusion
The scrutiny assessment is no doubt an embarrassing and an unwelcome experience.
At the same time, it is a necessary evil as otherwise the wrongdoers would
benefit at the cost of the innocent and honest tax-payers. A serious introspection
is required on the part of both the parties. The courts have held that
the department and the assessee are not two adversaries but that the entire
machinery is to facilitate the determination of correct income and tax.
Professionals are expected to take a balanced approach. While they resist
any unjust action of the department, they should treat this as an opportunity
to improvise their own presentation of the case and also to educate their
clients for achieving better compliance level.
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