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Civil Miscellaneous Writ No. 1270 of 1966, decided on 8th November 1968.

‑Provisional assessment‑Whether Income‑tax Officer bound to accept the return or can consider any deviation from law Carried forward loss in return‑Whether an item of loss should be accepted when a lower amount had been allowed in the assessment for an earlier year but was under appeal‑An item of deduction claim ed but not yet decided in an earlier year‑Whether the deduction should be allowed in the provisional assessment‑‑income‑tax Act, 1961, Ss. 72(1), 73(2), 74(1), 80 & 141.

The petitioner‑assessee filed a return of its income for the assessment year on the basis of a net income of Rs. 47,412, after setting off Rs. 3,79,889, the aggregate of losses carried over from the preceding years. The amount of loss carried over included the sum of Rs. 4,64,357 claimed by the assessee as loss in his return for the assessment year 1960‑61 and a deduction of Rs. 51,698 on account of litigation expenses relating to the assess ment year 1961‑62. In making a provisional assessment under section 141 for the assessment year 1965‑66, the Income‑tax Officer held that, as in the assessment for the assessment year 1960‑61, the Income‑tax Officer had determined the loss at Rs. 1,90,982, only that amount could be carried over and not Rs. 4,64,357 ; he also disallowed the claim of Rs. 51,698 for litigation expenses as no details as to their admissibility were supplied by the assessee. The assessee challenged the notice of demand by the petition for a writ of certiorari on the grounds that the Income‑tax Officer was bound to make the provisional assessment on the basis of the return filed by the assessee .Together with the accounts and documents and was not entitled to examine whether the provisions of the Act have been followed by the assessee when computing his assessable income, that the assess ment year 1960‑61 was not final as it was subject to an appeal and, therefore, the Income‑tax Officer should have accepted the carried forward loss of Rs 4,64,357 as given by the assessee when making a provisional assessment and that the Income‑tax Officer should have given a deduction for the litigation expenses of Rs. 51,698.

Held, that (i) though adjudication of complicated questions of law is not contemplated within the scope of the Income‑tax Officer's powers under section 141, any patent deviation from the law by the assessee in drawing up the return can be corrected or disregarded by the Income‑tax Officer ;

(ii) that under section 80 read with sections 72(1), 73(2) and 74(1), when a loss has been determined in pursuance of a return, it is the loss so determined to which effect must be given and it remains a determined loss so long as it is not displaced by a superior authority and, therefore, the figure of Rs. 1,90,982 must be considered as the loss to be carried for ward ; and

(iii) that the claim for deduction of Rs. 51,698 for litigation expenses in the assessment year 1961‑62 had not been investigat ed as no assessment had as yet been made for the assessment year 1961‑62 and, therefore, there was no reason for disregard ing the claim of Rs. 51,698 in considering quantum of loss to be carried forward.

Jaipur Udhyog Ltd. v. Commissioner of Income‑tax (1965) 58 I T R 118 ref.

R. K. Upadhaya and J. C. Bhuradwaj for Petitioner.

R. L. Gulati for Respondent.

The petitioner, a private limited company, filed a return of its income for the assessment year 1965‑66. The return was drawn up on the basis that the income of the previous year relevant to the assessment year 1965‑66 was Rs. 3,79,889 anti after setting off the aggregate of the losses carried over from tine preceding years totalling Rs. 3,32,477 the net taxable income was Rs. 47,412. On the basis of the return, the petitioner paid a. sum of Rs. 23,705 as self‑assessed tax under section 140‑A of the income‑tax Act, 1961.

On August 21, 1965, the Income‑tax Officer, A‑Ward, Aligarh, served a notice upon the petitioner stating:

"Kindly refer to your returned income at Rs. 47,412. The income at this figure has been returned by you after claiming loss of Rs. 3,32,477 for which no details have been filed. A perusal of this office records revealed that the position of determined loss and returned profits and losses was as under

Loss Profit

1960‑61 ‑ ‑ Rs. Rs.

Determined loss 1,90,982 ‑

1961‑62

Loss 92,079 ‑

1962‑63

Profit ‑ 2,14,583

1963‑64

Profit ‑ 5,171

2,83,061 2,19,754

Diff. Loss 63,307

For the assessment year 1964‑65 you have disclosed a loss of Rs. 31,912. Hence your total loss comes to Rs. 95,219 as against. Rs. 3,32,477 claimed by you. It may further be seen that in the assessment year for the previous year relevant to the assessment year 1961‑62 you have claimed litigation expenses of Rs. 51,698 without any details about their admissibility.

Further, Rs. 4,198 for property income deducted in Part IV of the return for the assessment year 1961‑62 have not separately been shown in the return as property income. Depreciation of Rs. 1,230 claimed in oil mill set has not been added in Part IV of the return for 1961‑62. Hence, if this debit of Rs. 51,698, Rs. 4,198 and Rs. 1,230 are deducted from the loss, the allowable loss remains at Rs. 38,093.

You are, therefore, requested to explain the computation of Rs. 3,32,477.

The petitioner submitted a reply explaining how the figure of Rs. 3,32,477 was arrived at. The relevant extract from the reply is set out hereunder :

Rs.

‑4,64,357 Loss returned, unascertained losses pending in appeals for the assessment

year 1960‑61.

35,357 Less items not seriously disputed‑Assessment years 1959‑60 and 1960‑61.

‑4,28,500 Loss for the assessment year 1960‑61.

‑92,079 Add loss for the assessment year 1961‑52.

‑5,20,579 Loss.

2,14,843 Less income ‑Assessment year 1962‑63 as per

return.

‑3,05,736 Loss‑Assessment year 1962‑63.

6,171 Less income‑1963‑64 as per return.

‑3,00,565 Loss

‑31,912 Loss as per return for 1964‑65.

‑3,32,477 Loss claimed for the assessment year 1965‑66 as

per return.

The Income‑tax Officer did not accept the case of the peti tioner and provisionally assessed the tax under section 141 on the basis indicated in his notice.

The petitioner challenges the notice of demand by the instant petition for certiorari. The petition came on for hearing before one of us sitting as a Single Judge and. as important questions of law were involved, the case was referred to a larger Bench. It has now been placed before us.

Section 141 of the Act provides for provisional assessment of tax payable by the assessee. The provisional assessment is to be made after the receipt of a return made under section 139. The provisional assessment is to be in a summary manner and on the basis of tree assessee's return and the accounts and documents, it any, accompanying it. In making such assessment, the statute: enjoins that due effect shall be given to the depreciation allowance referred to in section 32(2) and to any loss carried forward under section 72(1), or section 73(2) or section 74(1). It is further provided that after a regular assessment has been made any amount paid or deemed to have been paid towards the provisional assessment shall be deemed to have been paid towards the regular assessment, any excess paid being refundable to the assessee. The section further declares that nothing done or suffered by reason or in consequence of any provisional assessment made under it shall prejudice the determination on the merits of any issue which may arise in the course of a regular assessment. A right of appeal has been expressly denied against a provisional assessment.

An assessment to tax, provisional or regular, necessarily re quires a determintion of the assessable income. Unless the assess able income is determined, the tax cannot be computed. Now, the provisional assessment of tax must be made on he basis indicat ed by section 141 and that basis is the return filed by the assessee and the accounts and documents, if any, accompanying it. It is summary assessment. The return together with the accounts and documents accompanying it furnishes the base on which the Income‑tax Officer must proceed. The material disclosed there furnishes the factual foundation upon which the Income‑tax Officer must act. To that factual foundation he must apply the law in order to determine the net assessable income for the purpose of assessing the tax payable. While retaking this summary determination of the net assessable income he must give effect to the depreciation carried forward and to the loss carried for ward.

It is contended by the petitioner that it is not open to the Income‑tax Officer, when proceeding under section 141, to examine whether the provisions of the Income‑tax Act have been followed by the assessee when computing his assessable income. Now, it may be that an adjudication of complicated questions of law is not contemplated within the scope of the income‑tax Officer's powers under section 141. But certainly, in our opinion, he is entitled to see that there is no patent depar ture from the provisions of the Act in the computation of the assessable income by the assessee. It seems clear to us that any patent deviation from the law by the assessee in drawing up the return can be corrected or disregarded by the Income‑tax Officer. It should not, we think, be open to an assessee to claim that his return must be accepted for the purpose of provisional assessment even though the return proceeds upon a flagrant departure from the provisions of the statute and is In effect an unreal return. To what degree can such deviations be questioned by the Income‑tax Officer will depend upon the facts of each case. We are unable to accept the contention of the petitioner in the broad terms in which it is made that the Income‑tax Officer must accept the return and proceed on its basis even though in drawing it up the provisions of the Act have been grossly violated.

Turning froze these general observations to the specific objection raised by the Income‑tax Officer upon the assessee's return in this case, the first objection appears to be to the carry forward of the loss as claimed by the petitioner in the assessment year 1960‑61. The petitioner claimed that the loss at the claim ed figure of Rs. 4,64,357 returned by him for that year should be carried forward and set off when making the provisional assess ment for the year 1965‑66. It was urged that it had not been determined finally, being the subject of an appeal for the assess ment year 1960‑61. We are of opinion that the claim of the petitioner is not justified. In the determination of the assessable income for the assessment year 1965‑66 the loss can be carried forward only in accordance with and subject to the provisions relevant to the carry forward of loss in the Income‑tax Act, 1961. Those provisions are set out in sections 72 to 74. For the purpose of a provisional assessment under section 141, subsection (2) of section 141 expressly enjoins that due effect shall be given to the loss carried forward under those provisions. The words "due effect" are significant. "Due effect" implies that effect shell be given as contemplated by law. The carry‑forward of the loss under section 72 to section 74 is subject to section 80. Section 80 declares that no loss which has not been determined in pursuance of a return filed under section 139 shall be carried forward and set off under section 72(1) or section 73(2) or section 74(1). Reading section 80 with sections 72(1), 73(2) and 74(1), it is clear that when a loss has been determined in pursuance of a return, it ii the loss so determined to which effect must be given. The determination, at the relevant point of time, may have proceed ed to the stage of assessment by the Income‑tax Officer or to the further stage of appellate determination by an Appellate Assistant Commissioner or even by the Income‑tax Appellate Tribunal, or to the still further stage of reference in the High Court or an appeal before the Supreme Court. The loss as determined at the furthest stage to which the proceeding has reached is the loss which must be carried forward. It is not open to the assessee to say that the loss as determined by the Income‑tax Officer in the assessment proceeding is not the loss to be carried forward be cause he has appealed against the assessment, and that, therefore, he is justified in falling back upon the loss as claimed by him when drawing up the return. A loss determined by the Income. tax Officer in the assessment proceeding remains a determined loss so long as it is not displaced by the order of a superior authority. In the instant case, the assessee claimed a loss of Rs. 4,64,357 when filing the return for the assessment year 1960‑61. That loss was determined instead at Rs. 1,90,982 by the Income‑tax Officer. It is the figure of Rs. 1,90,982 which must be considered as the loss to be carried forward in relation to the assessment year 1960 61. We are supported in this view by what has been said by the Rajasthan High Court in Jaipur Udhyog Ltd. v. Commissioner of Income‑tax. ((1965) 58 I T R 118).

Then there are three other items which the Income‑tax Officer has taken into consideration. These relate to the assessment year 1961‑62. It is said that a sum of Rs. 51,698 was claimed as a deduction on account of litigation expenses but no details as to their admissibility were supplied by the petitioner. It is further said that a sum of Rs. 4,198 on account of property income deducted in Part IV of the return was not separately shown in the return as property income. Depreciation in the sum of Rs. 1,230 claimed in the oil mills set was not added in Part IV of the return.

In regard to the sum of Rs. 51,698 claimed as a deduction on account of litigation expenses in respect of the assessment year 1961‑62, the Income‑tax Officer decided to disregard it on the ground that no details as to its admissibility had been supplied by the petitioner. The necessity of supplying information in support of a claim to deduction of business expenditure arises upon the investigation of the claim. To examine the merits of the claim, the Income‑tax Officer would have to determine whether the payment was actually made, whether the litigation on account of which it was made was related to the business, and whether it could be said that the expenditure was laid out or expended wholly ante exclusive ly for the purpose of the business. The question arises when the In come‑tax Officer proceeds to investigate the claim. There is no mate rial before us to show that the assessment proceeding for the year 1961‑62 had reached that stage. We are rot satisfied that the assessment proceeding for 1961‑62 had progressed to the point where the petitioner was obliged to supply details as to admis sibility of the claim. Consequently, in considering the quantum of loss to be carried forward for the year 1965‑66, there was no reason for disregarding the claim of Rs. 51,698 made in the assess ment proceeding for 1961‑62. We are not deciding in this case whether the Income‑tax Officer was entitled in the proceeding under section 141 for the year 1965‑66 to investigate the merits of a claim made in the assessment proceeding for 1961‑62. In the view that we are taking that is not necessary. As the demand made by the Income‑tax Officer under section 141 for the year 1965‑66 is a single indivisible demand, the error committed by the Income tax officer in disregarding the sum of Rs. 51,698 is sufficient to vitiate the demand and entitle the petitioner to an order quashing it. It is not necessary for us to examine whether the view taken by the Income‑tax Officer in regard to the remaining two items of Rs. 4,198 and Rs. 1,230 is relevant for the proceeding under section 141. As the demand under section 141 is vitiated, these are matters which will be reconsidered by the Income‑tax Officer when he proceeds to make a fresh demand under section 141.

The petition is allowed. The notice of demand under sec tion 141 of the Income‑tax Act, 1961, is quashed. It is open to the Income‑tax Officer to proceed afresh in accordance with law in order to provisionally assess the petitioner under section 141 of the Act. The petitioner is entitled to his costs.

Petition allowed.

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