High Court Of Kerala
CIT vs. Forbes, Ewart & Figgis Ltd.
Sections 80HHC
G. Sivarajan & J.M. James, JJ.
IT Ref. No. 130 of 1999
8th April, 2003
Counsel Appeared
P.K.R. Menon, for the Applicant : Antony Dominic & Anil D. Nair, for the Respondent
JUDGMENT
G. Sivarajan, J. :
The Tribunal, Cochin Bench, has referred the following two questions of law under s. 256(1) of the IT Act, 1961 (for short ‘the Act’) for decision by this Court at the instance of the Revenue :
“1. Whether, on the facts and in the circumstances of the case, and also in view of the fact that the assessee had failed to create the reserve before the closing of the accounts and drawing of the P&L a/c, the assessee was entitled to the benefit of s. 80HHC of the IT Act ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee had created the requisite reserve envisaged in the proviso to s. 80HHC in its amended accounts in relation to the previous year in respect of which deduction was claimed by it and are not such creation of reserve and amendment of accounts impermissible and against the law ?” The respondent-assessee is a closely held company carrying on business in tea auctioning and export of goods. In the assessment for the year 1986-87 the assessee claimed relief under s. 80HHC of the Act. The AO rejected the claim inter alia on the ground that the assessee had not complied with the requirements of the proviso to sub-s. (1) of s. 80HHC. In appeal by the assessee the CIT(A), Cochin granted the relief. This was confirmed by the Tribunal in appeal ITA No. 656/Coch/1990 filed by the Department. Sri P.K.R. Menon, learned Central Government standing counsel for taxes appearing for the applicant submits that the assessee had not debited an equal amount of deduction available under s. 80HHC(1) to the P&L a/c of the previous year in respect of which the deduction is claimed and have also failed to create a reserve to be utilised for the purpose of the business of the assessee before finalisation of the P&L a/c which is a mandatory requirement under the proviso to s. 80HHC. The senior counsel further submitted that at any rate the assessee should have complied with the said requirements at any time before the completion of the assessment that, in the instant case the P&L a/c finalised and approved by the annual general body meeting held on 30th Sept., 1986, and that the assessee did not create any reserve in the said P&L a/c. The senior counsel also submitted that the assessee had made the debit in the P&L a/c and created a reserve only during the pendency of the appeal before the CIT(A) by way of reopening of the P&L a/c already finalised and approved by the annual general body which is not permissible. He also submitted that none of the appellate authorities had considered the question whether the reopening of the P&L a/c was validly done except to rely on a communication issued by the department of company law affairs. The senior counsel accordingly submitted that both the appellate authorities had erred in allowing the claim under s. 80HHC of the Act. The senior counsel also relied on the decisions of the Supreme Court in CIT vs. Swadeshi Cotton and Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC), Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC) and Indian Overseas Bank Ltd. vs. CIT (1970) 77 ITR 512 (Mad).
4. The learned counsel appearing for the respondent-assessee on the other hand submitted that s. 80HHC(1) and the proviso thereto does not prescribe any specific period for debiting the eligible amount in the P&L a/c of the previous year or for creating a reserve account to be utilised for the purpose of the business of the assessee. The counsel submitted that the proviso only requires that an amount equal to the deduction available under s. 80HHC has to be debited to the P&L a/c which can be done at any time but it should be in relation to the profits of the previous year. The counsel also submitted that in the special circumstances and for technical reasons it is open to a company to reopen its P&L a/c already finalised and approved by the general body as clarified by the department of company law affairs in its letter dt. 19th Aug., 1987 addressed to the Institute of Chartered Accountants of India, New Delhi extracted in para 4 of the appellate order of the Tribunal. The counsel further submitted once the P&L a/c is reopened and corrections made it relates back to the previous year and consequently that will amount to fulfilment of the requirements of the proviso to s. 80HHC(1) of the Act. The counsel also referred to the decisions of the Andhra Pradesh High Court in Veerabhadra Iron Foundry & Anr. vs. CIT (1968) 69 ITR 425 (AP) and of the Rajasthan High Court in CIT vs. Mazdoor Kisan Sahkari Samiti (1970) 75 ITR 253 (Raj) which has taken the view that the P&L a/c can be amended to comply with the requirements of the proviso at any time before the completion of the assessment. The counsel further submitted that the Andhra Pradesh High Court in the decision mentioned above has left open the question as to what is the ultimate point of time beyond which the entries cannot be made. The counsel has also brought to our notice the decision of the Madras High Court in CIT vs. Sri Venkatesa Mills Ltd. (2001) 167 CTR (Mad) 289 : (1999) 235 ITR 665 (Mad) which has taken the view that the P&L a/c can be amended only till the finalisation of the assessment and thereafter it cannot be made. The counsel also submitted that when the company law under which the company is incorporated permits reopening of the P&L a/c even after in finalisation and approval by the annual general body and for correction it is no longer open to the authorities under the IT Act to question the proprietary of such correction.
5. As already noted, according to the Department the P&L a/c cannot be reopened after its finalisation and at any rate it can be reopened only before the finalisation of the assessment. But according to the respondent/assessee the reopening of the P&L a/c is governed by the provisions of the company law and that the department of company law affairs had clarified the position in their letter dt. 19th Aug., 1987, under which the P&L a/c can be reopened in the special circumstances and for meeting technical requirements. Here it must be noted that the Tribunal has largely relied on the circular issued by the department of company affairs in the letter dt. 19th Aug., 1987. Even for application of the communication issued by the Department of company affairs it has to be established that the present case is one which falls under the said clarification. In order to appreciate the communication issued by the department of company affairs it is necessary to see the query which is raised by the Institute of Chartered Accountants. Further, it has to be ascertained as to whether the situation in the present case is one falling under the special circumstances and can be treated as one for meeting the technical requirements of taxation laws. The first appellate authority has not made any effort to find out whether the assessee’s case satisfies the requirements of the communication. The Tribunal also has simply relied on the communication dt. 19th Aug., 1987, issued by the department of company affairs to hold that the assessee had satisfied the requirements of the proviso to s. 80HHC. The Tribunal also did not consider as to whether the assessee had satisfied the conditions in the communication. In the circumstances without going further into the merits of the matter we are of the view that the matter has to be remitted to the Tribunal for fresh consideration of the question in the light of the communication dt. 19th Aug., 1987, extracted in para 4 of the appellate order of the Tribunal and in the light of the legal principles governing the same. It is open to the assessee and the Revenue to raise all the contentions regarding the binding nature of this communication. For the said purpose we set aside the order of the Tribunal on this issue and remit the matter to the Tribunal for fresh disposal in accordance with law and in the light of the observations made hereinabove. In the light of the above, we decline to answer the questions referred.
[Citation : 267 ITR 153]
