Karnataka H.C : The disallowance made by the AO in respect of ‘corporate guarantee obligation’ amounting to Rs. 18,67,21,730 does not come within the purview of prima facie adjustment as laid down under s. 143(1)(a)

High Court Of Karnataka

CIT vs. Mcdowell & Co. Ltd.

Section 143(1)(a)

Asst. Year 1994-95

R. Gururajan & Jawad Rahim, JJ.

IT Ref. Case No. 660 of 1998

22nd June, 2006

Counsel Appeared

M.V. Seshachala, for the Applicant : S. Parthasarthi, for the Respondent

ORDER

R. Gururajan, J. :

The Income-tax Appellate Tribunal, Bangalore Bench (for short ‘the Tribunal’) has chosen to refer the following question of law for our consideration under s. 256(1) of the IT Act :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the disallowance made by the AO in respect of ‘corporate guarantee obligation’ amounting to Rs. 18,67,21,730 does not come within the purview of prima facie adjustment as laid down under s. 143(1)(a) of the IT Act ?

The assessee is a company. The assessment year involved is 1994-95. While processing the return of income under s. 143(1)(a), the AO found from the return and the accompanying documents that a sum of Rs. 18,67,21,730 representing ‘corporate guarantee obligation’ had not been debited to the P&L a/c. It was claimed as a revenue deduction in the statement of consolidation of return of income. According to the AO, the above was not a prima facie admissible deduction. He disallowed the same. An appeal was filed. The appellate authority confirmed the disallowance and aggrieved by that order, an appeal was filed before the Tribunal. The Tribunal accepted the case of the assessee and ruled that the prima facie adjustment was made out in its order. In the light of the order of the Tribunal, the Revenue sought for a question of law and after hearing, the question of law as referred to above was referred for consideration by the Tribunal. Heard Sri Seshachala, learned counsel for the Revenue. He takes us through the entire material on record to contend that no prima facie case as such was made out in terms of s. 143 of the IT Act. He argues that there is no liability on the part of the company and that therefore, the disallowance by the AO is proper and legal. He finds fault with the order of the Tribunal.

4. Sri Parthasarathi, learned counsel would support the order.

5. After hearing, we have carefully perused the material on record. The adjustment explanatory sheet is available and in terms of the said adjustment, it is seen that the AO has chosen to disallow the corporate guarantee obligation in the following manner : “This payment is in the nature of discharge of a liability on behalf of another company of the group, viz., U.B. Elostomers Ltd., as a guarantor of the loans borrowed by M/s U.B. Elostomers Ltd. Since this payment is a recoverable debt from M/s U.B. Elostomers Ltd., the same cannot be claimed as a deduction in the statement of computation of income.”

6. Aggrieved by the disallowance of this item, an unsuccessful appeal was filed before the appellate authority. Thereafter, the matter was taken to the Tribunal and, the Tribunal has chosen to accept the case of the assessee in the impugned order.

7. A reading of s. 143 would show that adjustment is permissible under three circumstances : (i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified; (ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed. (iii) any loss carried forward, deduction, allowance or relief, claimed in the return, which, on the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed. From a reading of the above, what is clear is that while considering a proceeding under s. 143 (1)(a), what is required to be noticed by the AO is only a prima facie consideration and not a detailed fool proof consideration as is being done at the time of final proceedings. It is only an enabling provision providing for allowance/disallowance depending upon the prima facie case on the facts and circumstances of each case. Prima facie case would depend upon several circumstances available on record. The dictionary meaning of ‘prima facie’ is ‘at first sight’; ‘on the first appearance’; ‘on the face of it’. Therefore, ‘prima facie’ cannot be equated to a debatable detailed consideration in terms of s. 143 of the Act. If the material at the first sight provides for a prima facie admissible or not admissible, then the AO is free to consider the case in terms of s. 143 of the IT Act. In the case on hand, the AO has virtually decided the issue while disallowing the corporate guarantee obligation in the case on hand. The appellate authority also has taken into consideration, the various aspects of the matter as though the appellate authority was deciding the case finally. The Tribunal on noticing the approach of the AO and the appellate officer, rightly, in our view, has chosen to say that a debatable issue cannot be decided under s. 143(1)(a) of the Act. What is required to be seen is a prima facie consideration for the purpose of allowance or disallowance depending upon the material placed on record. Admittedly, in the case on hand, an agreement is available and so also guarantee obligation as to whether the guarantee can be enforced, etc., is at the stage of final hearing and it cannot be decided at the first sight or at the first appearance as has been done in the case on hand.

We are satisfied that on the facts of this case, a prima facie case as such was made out as rightly ruled by the Tribunal. The Tribunal’s findings in the given circumstances cannot be faulted on the facts and circumstances of this case. In fact, our findings get further strengthened in the light of the subsequent acceptance of the claim by the Tribunal. Therefore, we are satisfied on facts that prima facie case as such was made out by the assessee on the facts and circumstances of this case. We also deem it proper to say at this juncture that prima facie case is not to be understood as a proof of obligation by way of evidence, etc. Prima facie consideration has to be prima facie or to use the dictionary meaning ‘at the first sight’ or ‘the first impression’. It may be that impression may be varied/modified or even destroyed at the stage of final hearing. That final hearing approach has not to be the approach at the first impression namely, prima facie impression in terms of s. 143 of the Act. The Revenue places before us the judgment of the Supreme Court reported in Madan Gopal Bagla vs. CIT (1956) 30 ITR 174 (SC). A reading of the said judgment would show that it is not a case of prima facie consideration under s. 143 of the Act. This Court in God Granites vs. CBDT & Ors. (1996) 130 CTR (Kar) 252 : (1996) 218 ITR 298 (Kar) has chosen to hold that under the guise of effecting (an adjustment) under s. 143(1)(a), the AO cannot decide the debatable issues. We are satisfied that in the given circumstances, a prima facie adjustment was made out by the assessee. In the result, we deem it proper to answer the questions of law against the Revenue and in favour of the assessee. Ordered accordingly. No costs.

[Citation : 286 ITR 203]

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