Court clarifies: Assessment under 143(3) or 115JB, not both simultaneously

Case Name**: COMMISSIONER OF INCOME TAX VS INTERNATIONAL AUTO LTD.

**Key Takeaways**:

1. An assessment order can be passed either under Section 143(3) (of Income Tax Act, 1961) or Section 115JB (of Income Tax Act, 1961), but both cannot coexist.

2. The Assessing Officer should consider the assessee's claim under Section 115JB (of Income Tax Act, 1961) before proceeding with assessment under Section 143(3) (of Income Tax Act, 1961).

3. The court emphasized the importance of clarity in assessment orders to avoid confusion and contradictions.

**Issue**: Whether the assessment order was passed under Section 143(3) (of Income Tax Act, 1961) or Section 115JB (of Income Tax Act, 1961)?

**Facts**:

1. The assessee (International Auto Ltd.) filed returns showing 'NIL' income but declared a book profit of Rs. 2,05,86,930 under Section 115JB (of Income Tax Act, 1961) .

2. The Assessing Officer (A.O.) issued notices under Sections 143(2) (of Income Tax Act, 1961) and 142(1) .

3. The A.O. made additions to the assessee's income, including Rs. 7,49,672 as unexplained income and Rs. 34,44,754 under Section 40(a)(ia) (of Income Tax Act, 1961) .

4. The A.O.'s order mentioned assessment under Section 143(3) (of Income Tax Act, 1961) but also included a line about computation under Section 115JB (of Income Tax Act, 1961) .

5. The Commissioner of Income Tax (Appeals) partly allowed the assessee's appeal .

6. The Income Tax Appellate Tribunal (ITAT) restored the matter to the A.O. for recomputing the demand under Section 115JB (of Income Tax Act, 1961) .

**Arguments**:

- Revenue: The assessment was made under Section 143(3) (of Income Tax Act, 1961), as evident from the detailed scrutiny of accounts and additions made .

- Assessee: The case falls under Section 115JB (of Income Tax Act, 1961), and the A.O. had no jurisdiction to scrutinize the books of accounts deeply .

**Key Legal Precedents**:

The judgment mentions Apollo Tyres Ltd. Vs. Commissioner of Income Tax (2002) 255 ITR 273 (SC), which discusses the purpose of introducing Section 115J (of Income Tax Act, 1961) (predecessor to 115JB) .

**Judgement**:

1. The High Court set aside the orders of the ITAT, CIT(Appeals), and the A.O. .

2. The matter was remanded to the A.O. for fresh consideration .

3. The court directed the A.O. to decide whether the assessment should be made under Section 115JB (of Income Tax Act, 1961) or Section 143(3) (of Income Tax Act, 1961) .

4. The court found that the ITAT erred in holding that the A.O. had not made additions under regular provisions (Section 143(3) (of Income Tax Act, 1961)) .

5. The court also noted that the A.O. should have considered the assessee's claim under Section 115JB (of Income Tax Act, 1961) before proceeding under Section 143(3) (of Income Tax Act, 1961) .

**FAQs**:

Q1: What was the main issue in this case?

A1: The main issue was determining whether the assessment order was passed under Section 143(3) (of Income Tax Act, 1961) or Section 115JB (of Income Tax Act, 1961).

Q2: Can an assessment be made under both Section 143(3) (of Income Tax Act, 1961) and Section 115JB (of Income Tax Act, 1961) simultaneously?

A2: No, the court clarified that an assessment order can be passed either under Section 143(3) (of Income Tax Act, 1961) or Section 115JB (of Income Tax Act, 1961), but both cannot coexist.

Q3: What did the High Court decide in this case?

A3: The High Court set aside the previous orders and remanded the matter back to the Assessing Officer for fresh consideration, directing them to decide whether the assessment should be made under Section 115JB (of Income Tax Act, 1961) or Section 143(3) (of Income Tax Act, 1961).

Q4: What was the significance of the Apollo Tyres Ltd. case mentioned in the judgment?

A4: The Apollo Tyres Ltd. case was cited to discuss the purpose of introducing Section 115J (of Income Tax Act, 1961) (now 115JB) and the limitations on the Assessing Officer's power to scrutinize books of accounts under this section.

Q5: What lesson can be learned from this case for future assessments?

A5: This case highlights the importance of clarity in assessment orders. Assessing Officers should clearly state under which section they are proceeding and consider all relevant claims made by the assessee before making a decision.

1. Heard learned counsel for the parties at length.

2. The following questions of laws are involved in this appeal :

(I) “Whether on the facts and in the circumstances of the case the learned ITAT has erred by holding that the AO has not made the impugned additions under the regular provisions of the Act whereas the records show to the contrary thereby making the said finding perverse?”

(ii) “Whether on the facts and in the circumstances of the case the learned ITAT has erred in law by impliedly upholding the deletion of addition of Rs. 7,49,672/- representing unverifiable transactions?”

(iii) “Whether on the facts and in the circumstances of the Case the learned ITAT has erred in law by impliedly upholding the deletion of addition of Rs. 34,44,754/- representing disallowance under Section 40(a)(ia) (of Income Tax Act, 1961)?”

3. Learned counsel for the appellant submitted that in fact the assessee was assessed under Section 143(3) (of Income Tax Act, 1961), which is apparent from the assessment order dated 26.12.2007, copy of which has been placed on record as annexure-1. It is submitted that it is true that the assessee wanted to take benefit under Section 115JB (of Income Tax Act, 1961) and he has also shown his total income for the assessment year 2005-06 as 'NIL' but A.O. issue-wise considered various components and before that, he issued letters under Section 133(6) (of Income Tax Act, 1961) to different parties. In some of the cases, reply was received and in others, either the letter was remained unserved or no reply was received. Thereafter, a show-cause notice was also given to the assessee about the above facts and he was asked to show reasons as to why the books of account should not be rejected. After considering the contentions of the assessee, the A.O. observed that the representative of the assessee could not produce any evidence for the proof of some of transactions and, therefore, held that assessee was unable to prove the genuineness of transactions with the above parties. The books of accounts were not believed and the transactions made with the above parties are treated as unexplained and relevant amounts were added to the total income of the assessee and thereafter, the A.O. ordered to proceed under Section 271(1)(c) (of Income Tax Act, 1961) for imposition of penalty. A.O. also considered the claim of the assessee under Section 40(a)(ia) (of Income Tax Act, 1961) and after rejecting the claim, added the income of Rs.34,44,754.17. Some of the expenses were also found unverifiable expenses and thereafter, specifically in the operative part of the assessment order, ordered “ Assessed under Section 143(3) (of Income Tax Act, 1961) on a total income of Rs.67,52,390.00. Allowed B/f Losses if any.”

However, it appears that learned A.O. inadvertently or wrongly also ordered-

“The computation as per 115 JB is modified accordingly” and “Charge interest as per Law. Penalty proceeding under Section 271(1) (of Income Tax Act, 1961)(c ) of the I.T. Act, 1961 is hereby initiated for the above. Issued D.N. with Challan.”

This clearly indicates that the assessment order was under Section 143(3) (of Income Tax Act, 1961) and not under Section 115 (of Income Tax Act, 1961) JB of the Act of 1961.

4. The assessee preferred appeal against the said assessment order which was partly allowed by the C.I.T.(Appeal) vide order dated 23.01.2009. The C.I.T. (Appeal) also considered each and every component which has been considered by the A.O. and thereafter, deleted the above addition which could have been done only in regular assessment under Section 143(3) (of Income Tax Act, 1961) only and not under Section 115JB (of Income Tax Act, 1961).. However, while considering ground no.4, the C.I.T. (appeal) held that “the AO has added back the sum of Rs. 7,49,672/-, Rs. 4,86,973/- and Rs. 34,44,754/- to the Book Profit for the purpose of charging tax u/s 115 (of Income Tax Act, 1961) JB without giving any reason.” The C.I.T.(Appeal) directed the A.O. to remove the amounts added by him to the sum of Rs.20,70,995/-.

5. Aggrieved against the order of C.I.T.(Appeal) dated 23.01.2009, the Revenue preferred appeal and the cross objection was submitted by the assessee. The Tribunal was also of the view that the C.I.T.(Appeal) has deleted the addition under Section 40(a)(ia) (of Income Tax Act, 1961) which does not have any relevance for the calculation made under Section 115 (of Income Tax Act, 1961) JB. The Tribunal considered the books profit of the assessee which was shown to be Rs.2,05,94,131/-, which is much higher than the profit computed as Rs.67,52,394/-. However, the Tribunal was of the view that a patent mistake has been crept in the order of the A.O. which has been dealt with by the C.I.T.(Appeal) without appreciation of the facts. The Tribunal also held that the endeavour of the A.O. was not to tax under the regular provisions of the Act when the assessee is paying more tax under the provisions of Section 115 (of Income Tax Act, 1961) JB. The Tribunal also took note of the fact that C.I.T. (Appeal) heard the assessee's appeal on the demand notice issued by the A.O. under Section115 (of Income Tax Act, 1961) JB and therefore, on the solitary issue of the rectification of the demand notice under Section 115 (of Income Tax Act, 1961) JB, the matter was restored to the file of the A.O. for recomputing the demand under Section 115 (of Income Tax Act, 1961) JB.

6. According to learned counsel for the appellant, it was a case of assessment under Section 143(3) (of Income Tax Act, 1961), whereas according to learned counsel for the assessee, it was assessment under Section 115JB (of Income Tax Act, 1961).

7. Learned counsel for the assessee relied upon a judgment of Hon'ble Supreme Court delivered in the case of Apollo Tyres Ltd. Vrs. Commissioner of Income Tax reported in (2002) 255 ITR 273 (SC) wherein purpose of introduction of Section 115J (of Income Tax Act, 1961) has been considered in detail and that too, after considering the Budget Speech of Finance Minister made in Parliament while introducing the said Section.

8. Learned counsel for the assessee vehemently submitted that in view of this decision of Hon'ble Supreme Court, the A.O. had no jurisdiction to even look deeply into the books of account of the assessee when the books of account have been maintained as required under the provisions of Companies Act and have been duly audited. Hon'ble Supreme Court clearly held that such enquiry is beyond the scope under Section 115JB (of Income Tax Act, 1961). According to learned counsel for the appellant, the assessee submitted returns of his income as 'NIL' and he has right to submit such returns in a case where his case is squarely covered under Section 115 (of Income Tax Act, 1961) JB which is a special provision for the Companies who are showing less profit than the profit shown in previous years to the relevant year.

The provision has been made for taxing such Companies also and in that situation also, some tax can be imposed. The complete proceeding for assessment in such a situation has been given under Section 115 (of Income Tax Act, 1961) JB wherein the provision has been made with respect to the computation of income and provision for disallowance on certain components whereas some permissible depreciations are allowed. It is submitted that in view of the fact that the petitioner submitted his returns under Section 115JB (of Income Tax Act, 1961) and the A.O. in his order itself, very clearly mentioned that the computation is required to be as per Section 115JB (of Income Tax Act, 1961) and such finding has been upheld by the C.I.T.(Appeal), then it is a pure question of fact and that has been upheld by the Tribunal. Therefore, no question of law is involved in the present appeal. Otherwise also, on merit, there is no illegality committed by the C.I.T.(Appeal) as well as by the Tribunal in holding that the case of the petitioner is covered under Section 115 (of Income Tax Act, 1961) JB.

9. We have considered the submissions of the parties, perused all the facts of the case and reasons given by the A.O., C.I.T.(Appeal) and the Tribunal.

10. After going through the assessment order, annexure-1, we are of the considered opinion that the assessee may have submitted his returns showing his total income as 'NIL' and has shown book profit of Rs.2,05,86,930/- under Section 115JB (of Income Tax Act, 1961) but A.O. has not proceeded to consider the case of the petitioner under Section 115 (of Income Tax Act, 1961) JB and clearly mentioned in first para of the order itself that “the case was duly processed u/s 143(1)(a) (of Income Tax Act, 1961) and thereafter on selection of the case of scrutiny, statutory notices u/s 143(2) (of Income Tax Act, 1961) & 142(1) were issued.” Such notices were duly responded by the assessee's representative and the case was contested and proceeded under Section 143(1)(a) (of Income Tax Act, 1961) and assessment was made under Section 143(3) (of Income Tax Act, 1961). Therefore, before the A.O., assessee tried to justify the books of account and did not rely upon the principle that under Section 115 (of Income Tax Act, 1961) JB, the A.O. need not go into the details of the scrutiny of the books of account. The A.O. not only proceeded in this manner under Section 143 (of Income Tax Act, 1961), but in fact, disbelieved the books of account and added Rs.7,49,672/- in the income of the assessee as unexplained income. Then, the A.O. proceeded to examine the claim of deduction under Section 40(a)(ia) (of Income Tax Act, 1961) and added Rs. 34,44,754.17 in the total income of the assessee and thereafter, rejected the certain expenses in unequivocal term and declared the assessment under Section 143(3) (of Income Tax Act, 1961) on a total income of Rs.67,52,390/-.

However, in the entire orders, without there being any consideration of Section 115JB (of Income Tax Act, 1961), this line has been mentioned in operative part of the order -

“The computation as per 115JB is modified accordingly.”

We are of the considered opinion that this assessment was under Section 143(3) (of Income Tax Act, 1961) and the two orders cannot coexist, one under Section 143(3) (of Income Tax Act, 1961) and another under Section115JB (of Income Tax Act, 1961). Since in operative part of the order, the purpose was to be under Section 143(3) (of Income Tax Act, 1961) and that finds support from the reasons mentioned in the order, we are of the considered opinion that it was a mistake on the part of the A.O., who observed that the computation as per under Section 115JB (of Income Tax Act, 1961) is to be made.

11. The C.I.T.(Appeal) also proceeded to decide the matter as though it was a regular assessment under Section 143(3) (of Income Tax Act, 1961) and, therefore, after computing each and every addition made by the A.O., on facts, reversed the findings recorded by the A.O. At this juncture, we may make it clear that the issue is not that whether addition made by the A.O. was rightly deleted by the C.I.T.(Appeal) and the issue before us is only with respect to the nature of the order for the purpose of finding out whether under which provision of Section 143(3) (of Income Tax Act, 1961) or Section 115 (of Income Tax Act, 1961) JB, the A.O. or the C.I.T.(Appeal) proceeded to decide the matter.

As we have already made clear that A.O. decided the matter as per provisions of Section143(3) (of Income Tax Act, 1961), the C.I.T.(Appeal) also proceeded to delete the addition by examining the books of account and relevant material facts and not on the ground that the A.O. had no jurisdiction to question the correctness of the audited accounts, balance sheet, books of accounts under Section 115JB (of Income Tax Act, 1961), even C.I.T.(Appeal) also proceeded to examine the matter under Section 143(3) (of Income Tax Act, 1961) and deleted the addition. At this juncture, it is worthwhile to mention here that C.I.T. (Appeal) also, while considering the ground no.4 of addition of disallowance made to the book profit, held that it is a case under Section 115JB (of Income Tax Act, 1961). Therefore, the order of the C.I.T.(Appeal), on the face of it, is contrary to the earlier findings recorded in other additions made by the A.O. and deleted by the C.I.T.(appeal) when it decided the addition of disallowance made to book profit.

12. The Tribunal also held that the A.O. committed error and same error has been committed by the C.I.T.(Appeal) irrespective of the fact that the A.O. decided in favour of the assessee, yet according to Tribunal, both committed mistakes. The Tribunal come to the conclusion that when the assessee paying more tax under Section 115 (of Income Tax Act, 1961) JB and even observed that it is no body's case that the regular assessment under the provisions of Section 143(3) (of Income Tax Act, 1961) would have fetched more tax to the Revenue. We do not find any reason for such observation when Tribunal was of the view that neither the A.O. nor the C.I.T. (Appeal) had appreciated the facts. The Tribunal also ignored this fact that the A.O. and C.I.T.(Appeal), both considered each and every fact, which is required to be considered under Section 143(3) (of Income Tax Act, 1961) and then in that situation, merely because of the one line in the operative part of the order contrary to the specific facts mentioned in the first para that the case is duly processed under Section 143(1)(a) (of Income Tax Act, 1961), the Tribunal should not have directed the A.O. to rectify the demand notice under Section 115JB (of Income Tax Act, 1961) and the Tribunal held in this way - “Therefore, on the solitary issue of the rectification of the demand notice u/s115JB (of Income Tax Act, 1961), the issue is restored to the file of the Assessing Officer for recomputing the demand u/s.115JB (of Income Tax Act, 1961) under the strict provisions of taxation of book profits u/s.115JB (of Income Tax Act, 1961).”

13. In view of the above, the question number- 1 is answered that the ITAT has erred by holding that the AO has not made the impugned additions under the regular provisions of the Act, obviously, under Section 143(3) (of Income Tax Act, 1961) and the ITAT has also committed error of law in upholding the deletion of addition of Rs.7,49,672/- and Rs.34,44,754/-, referred above.

However, we are of the considered opinion that the A.O. should have considered the plea of the assessee also before holding that he is proceeding under Section 143(1)(ia) (of Income Tax Act, 1961), and in pursuance of notice under Section 143(2) (of Income Tax Act, 1961) and 142(1) of the Act of 1961, but he should have considered the asseess's claimunder Section 115JB (of Income Tax Act, 1961), which has not been and as such, rejected the plea of the assessee in spite of taking note of the fact that assessee has shown the book profit of Rs.2,05,86,930/- under Section 115JB (of Income Tax Act, 1961).

Therefore, the impugned orders i.e., order of the Tribunal dated 14.07.201; the order of the C.I.T.(Appeal) dated 23.01.2009 and the assessment order dated 26.12.2007; are set aside. The matter is remanded to the A.O. for fresh consideration in the light of the observations made hereinabove, obviously to decide whether the assessment is required to be made under Section 115JB (of Income Tax Act, 1961) or under Section 143(3) (of Income Tax Act, 1961).

This appeal is allowed accordingly.

(Prakash Tatia,C.J.)

(Aparesh Kumar Singh, J.)