Rajasthan H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessment orders did not become time barred under sub-s. (1) of s. 153 of the IT Act, 1961, in view of the provisions of the Explanation (1) to the said sub-section ?

Counsel Appeared

N.M. Ranka, for the Assessee : R.N. Surolia, for the Revenue

J.S. VERMA, C.J.:

A consolidated reference has been made for the asst. yrs. 1969-70 to 1974-75 under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ” the Act “), at the instance of the assessee for answering the following questions of law, namely:

” 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessment orders did not become time barred under sub-s. (1) of s. 153 of the IT Act, 1961, in view of the provisions of the Explanation (1) to the said sub-section ?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the realisations made by the official liquidator by running the business of the assessee-company are income liable to tax under the IT Act, 1961?

If the answer to question No. 2 is in the affirmative, whether the Tribunal was right in law in holding that deduction on account of interest payable to the creditors could not be allowed in the computation of the income ?

If the answer to question No. 2 is in the affirmative, then: (i) Whether, on the facts and in the circumstances of the case and on a correct interpretation of the terms of the agreement dated October 31, 1955, and the consent decree dated February 25, 1959, the Tribunal is justified in holding that the assessee is not the owner of the Cinema theatre styled ‘Maratha Mandir’ and the machinery, plant, furniture, etc., installed in the said building by the assessee with its own finances and no depreciation and development rebate is available to it in respect thereof? and (ii) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in rejecting the alternative contention of the assessee that the amount spent by the assessee-company on the construction of the cinema known as Maratha Mandir and in purchasing the movable assets installed therein out of its own funds is neither capital nor revenue expenditure ?

5. Whether, the Tribunal is correct in law in holding that no notice to show cause need be given to the assessee before levying penal interest under s. 139/215/217(1A) of the IT Act, 1961 ?

6. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the ITO is not under an obligation to reduce or waive the penal interest under s. 139/215/217 (1A) of the IT Act, 1961, r/w r. 117A/ 40 of the IT Rules, 1962, without there being a petition by the assessee before him ?

7. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the learned AAC was right in not admitting additional evidence in respect of the assessee’s claim for reduction or waiver of penal interest in terms of r. 117A/40 of the IT Rules, 1962 ?

8. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee-company is not an industrial company ?

9. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee is not entitled to relief under s. 80G of the IT Act, 1961 ?

(Assessment year 1972-73 only)

10. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the expenditure in providing tea, coffee, coca-cola and bare meals is entertainment expenditure in terms of s. 37(2B) of the IT Act, 1961, and in sustaining the disallowance of Rs. 1,510, Rs. 2,538 and Rs. 2,024 on that view?”

(Assessment years 1972-73 and 1973-74 only)

2. The relevant assessment years are 1969-70, 1970-71, 1971-72, 1972-73, 1973-74 and 197475. The assessee, M/s Golecha Properties (P.) Ltd., went into voluntary liquidation on July 4, 1966. Pending the proceedings of winding up, its affairs were looked after by the official liquidator w.e.f. May 10, 1968. Soon after appointment of the official liquidator, the ITO applied to the company Court for permission under s. 446 of the Companies Act, 1956, to proceed with the assessment of the company. The company Court allowed the ITO to proceed with the assessments by his order dated August 12, 1969. The ITO completed the assessments for the years 1969-70 to 1971-72 on October 31, 1972. The assessee questioned the validity of these assessments on the ground that these were not completed within the time prescribed in s. 153 of the Act. The Revenue’s contention was that the assessments were within time after excluding the period during which the proceedings had been stayed by the Rajasthan High Court. The Tribunal has finally held that the assessments for the three asst. yrs. 1969-70 to 1971-72 were made within time as contended by the Revenue.

3. The assessee also contended that the receipts earned after the date of the winding up order passed by the company Court were not taxable as income under the Act, since the business was carried on by the official liquidator after the winding up order merely for the beneficial winding up of the company. This contention of the assessee has also been rejected throughout. It has been held that the company in liquidation, after the winding up order, does not lose its distinct character as a legal entity and the receipts earned by carrying on business after the date of the winding up order amount to income which is taxable under the Act.

4. The assessee also contended that even if the receipts so earned are taxable as income under the Act, the interest should be treated as business expenditure and deducted from the total receipts. This contention was rejected on the ground that in view of r. 179 of the Companies (Court) Rules, 1959, such an eventuality could arise only in the event of there being a surplus after payment in full of all the claims admitted to proof. It was held that this stage not having been reached, the question does not arise for decision.

5. It was further contended by the assessee that no penal interest could be charged under s. 139 or 215 without giving a prior opportunity to the assessee of showing cause against the same. It was held that there was no provision for giving such an opportunity and the provisions made for waiver or reduction in the amount of penal interest could be relied on by the assessee for this purpose. It was also held that no such claim having been made by the assessee, the question of reduction or waiver of interest did not arise.

6. The assessee also contended that it was entitled to deduction of the amount of depreciation on the various assets belonging to the company in the cinema talkies run by it. This claim was rejected following the reasoning given by the Tribunal for rejecting a similar claim relating to the asst. yr. 1965-66.

7. The assessee also claimed that it should be treated as an industrial company and the benefit of concessional rate of tax should be given on that basis. The Tribunal rejected this contention also following its view in respect of the earlier years’ assessments.

8. The assessee’s claim for deduction of Rs. 1,510 and Rs. 2,538 for the asst. yr. 1972-73 as expenditure incurred in providing tea, coffee and refreshment, etc., to the customers was also disallowed. Similarly, the assessee’s claim for rebate under s. 80G for contributions made towards the National Defence Fund and Jawan Relief Fund has been disallowed on the ground that the payments were not proved by producing the relevant receipts.

9. Aggrieved by the view taken by the Tribunal on these points, the assessee applied for a reference under s. 256(1) of the Act which has been made by the Tribunal to answer the above-quoted questions of law.

10. In respect of the same assessee, for some earlier years of assessment, reference was made under s. 256(1) of the Act to answer some questions of law arising out of the Tribunal’s order. The facts on the basis of which those questions were to be answered are the same and some of the questions in the present references are common. The decision of this Court in those earlier references is common and is reported in Golcha Properties (P) Ltd. vs. CIT (1987) 166 ITR 259 (Raj). It is not necessary to mention the other facts which are common and are mentioned in that decision. Similarly, it is not necessary to reconsider or discuss the questions which are common in these references also. There is no dispute that some of the questions herein being covered by that decision have to be answered following the decision in Golcha Properties’ case (supra). We shall first dispose of the questions which are covered by this earlier decision.

11. Question No. 1.—This question is covered by the decision in Golcha Properties’ case (1987) 166 ITR 259 (Raj). Following that decision, this question is answered in the affirmative and against the assessee.

12. Question No. 4.—We shall discuss questions Nos. 2 and 3 later, but having reached the conclusion that question No. 2 is to be answered in the affirmative, against the assessee, we are first taking up question No. 4, both parts of which are covered by the decision in Golcha Properties’ case (supra). Following that decision, both parts of question No. 4 are answered in the affirmative and against the assessee. Learned counsel for the assessee tried to contend that the insertion of sub-s. (1A) in s. 32 of the Act w.e.f. April 1, 1971, distinguishes the earlier decision in respect of the assessment years after 1970-71, since even a lessee of the building is entitled to get that benefit. The short answer to this contention is that no such expenditure by the assessee for the asst. yr. 1970-71 and, thereafter, has been shown to enable reliance being placed on sub-s. (1A) of s. 32 of the Act in respect of the subsequent years. Accordingly, the earlier decision in Golcha Properties’ case (supra) cannot be distinguished in respect of any of these assessment years.

13. Question No. 8.—There is no dispute that this question is also covered by the earlier decision in Golcha Properties’ case (supra). Following that decision, the answer to this question is given against the assessee.

14. Question No. 9.—This question does not really arise. The finding of the Tribunal is that the payments in respect of which relief under s. 80G of the Act is claimed by the assessee have not been proved by production of any receipts. It is obvious that without any proper proof of payment, the question of giving relief based thereon does not arise. This question is also, therefore, answered against the assessee.

15. Question No. 10.—There is no controversy at this stage that the expenditure incurred by the assessee in providing tea, coffee and snacks etc., to customers is a permissible deduction as held in the decisions of this Court in Devichand Bastimal vs. CIT (1985) 49 CTR (Raj) 43 : (1985) 156 ITR 166 and Metharam Lekhumal vs. CIT (1985) 52 CTR (Raj) 344 : (1987) 165 ITR 568. Accordingly, the Tribunal was not justified in disallowing the claim made by the assessee under this head. This question is, therefore, answered in favour of the assessee.

16. Question No. 2.—The contention of learned counsel for the assessee based on several provisions of the Companies Act is that the business of the company is carried on by the official liquidator for the limited purpose of beneficial winding up and not with the motive of earning profit. It is not disputed that the company continues to be a distinct entity and a legal person, even after the winding up order, during this period. It is argued that the absence of any profit motive shows that the receipts earned from the business during this period cannot be treated as income for the purpose of the Act. It is argued that the fact that no dividend is to be declared after the winding up order till the stage contemplated by r. 179 of the Companies (Court) Rules, 1959, is reached, also shows that it is not a business for the purpose of earning profits. Learned counsel added that the receipts earned from the business are mainly for the purpose of making payment to the creditors and not for earning any profits. In our opinion, the Tribunal was justified in rejecting this contention. The definition of ” income” contained in s. 2(24) of the Act is an inclusive definition and is wide enough to include the receipts earned from the business carried on by the official liquidator after the winding up order. The receipts are definitely profits and gains of the business which is admittedly carried on by the official liquidator on behalf of the company. Several decisions cited by learned counsel for the assessee are inapplicable for deciding the point. During the hearing, we pointed out to learned counsel for the assessee the decision in ITO vs. Official Liquidator, Swaraj Motors (P) Ltd. (In Liquidation) 1976 CTR (Ker) 335 : (1978) 111 ITR 77 (Ker), which negatives the assessee’s contention. Learned counsel for the assessee made no attempt to show how that decision is inapplicable. The question arose in that case in the context of s. 178 of the Act It was held that the tax payment referred to is in respect of the income of the company accrued before its winding up and it has no application to the income accruing to the company after the making of the winding up order. The fact that the receipts earned by the company before as well as after the winding up order, are income as defined in the Act and taxable thereunder, was not even doubted. In our opinion, the contention of learned counsel for the assessee has no merit and the view taken by the Tribunal on this point is justified.

17. Question No. 3.—This question arises on account of our conclusion that question No. 2 should be answered in the affirmative. The reasoning of the Tribunal for rejecting the assessee’s contention is that under r. 179 of the Companies (Court) Rules, 1959, this question can arise only in the event of there being a surplus after payment in full of all the claims admitted to proof, which stage has not yet been reached in the winding up proceedings. No defect in this reasoning has been pointed out. Learned counsel for the assessee contended that if the receipts earned from the business carried on by the official liquidator after the date of the winding up order is taxable as income, then deduction on account of interest payable to the creditors should also be allowed. There can be no doubt that in computing the taxable income under the Act, all permissible deductions have to be allowed while making the final regular assessment. However, at present, the question is only hypothetical, since even the possibility of payment of interest to creditors is not yet known. This question being hypothetical at this stage does not, therefore, require any decision. We, therefore, decline to answer the same.

18. Questions Nos. 5, 6 and 7.—These questions being connected are considered together. The material provisions are s. 139(8)(a) and the proviso thereunder r/w r. 117A of the IT Rules, 1962, and s. 215(4) r/w r. 40 of the IT Rules, 1962. A plain reading of these provisions and their harmonious construction lead to the inevitable conclusion that the liability for payment of interest thereunder is incurred automatically in the event of default by the assessee specified therein. This being so, the question of giving any show cause notice prior to fixing the liability for payment of this interest by an order does not arise. This liability for interest is attracted automatically by operation of law without the further requirement of any order to that effect. The order made merely quantifies the amount of interest. However, the ITO is empowered to reduce or even waive the interest at the instance of the assessee, if good cause is shown for the same by the assessee. It is, therefore, obvious that no prior show cause notice is required to be given to the assessee, since liability to pay the interest is attracted automatically by operation of law, but the rigour thereof is mitigated by empowering the ITO to reduce or even waive the amount, if good cause is shown by the assessee after incurring that liability. There is no breach of any principle of natural justice in the penal provision inasmuch as the assessee has an opportunity given by the statute to apply for reduction or even waiver of the amount by showing proper cause. The basic requirement of the principles of natural justice are, therefore, fully satisfied and it is incorrect to say that the provision violates the principles of natural justice by imposing a penalty without giving any opportunity to show cause against the same.

We may observe that it is the duty of the assessee to invoke the authority’s power of reduction or waiver of the amount of interest when the liability has been incurred by operation of law and, therefore, the occasion for the authority to decide this question would arise only when the assessee invokes that power by a proper application setting out the grounds on which reduction or waiver of interest is sought. Since the reduction or waiver can be granted only on good cause being shown by the assessee, it is obvious that the authority cannot act suo motu, the facts constituting ground for waiver or reduction being within the special knowledge of the assessee who has to disclose them. The further question is as to whether this power can be exercised only by the ITO and not thereafter in appeal by the appellate authority. We find no reason to hold that the appellate authority is not empowered to grant this relief, if the assessee invokes the power at the appellate stage and also shows sufficient cause for not being able to apply to the ITO in the original proceedings. In the present case, the assessee’s contention is that it entertained a bona fide belief that a prior show cause notice would be given before levy of penal interest and, therefore, no prayer for reduction or waiver of interest was made till the making of the assessment order by the ITO. This impression apparently was under a bona fide mistake about the construction of the relevant statutory provisions, which constitutes sufficient cause to explain the default in applying for waiver or redaction of interest to the ITO before the ITO’s final order was passed. In such a situation, the assessee could apply to the appellate authority for exercise of that power by showing the reason for the failure to apply before the ITO. The appeal is a rehearing of the original lis and the power of the appellate authority in this respect is conterminous with that of the original authority. There is neither principle nor authority to support the conclusion that the appellate authority cannot entertain the assessee’s request for waiver or reduction of interest and exercise that power given in these statutory provisions. In a case like the present, it would be permissible for the appellate authority to entertain such a request and to consider and decide it on merits. This view is also in consonance with the construction we have made of the statutory provisions that no prior show cause notice is necessary, but the assessee can thereafter invoke the power for reduction or waiver of interest. We find that a Division Bench of this Court in CIT vs. Devichand Pan Mal (supra) has taken the view that the AAC can consider the question of waiver or reduction of penal interest in appeal when the same had not been considered by the ITO. This decision also supports the conclusion we have reached on this point. We are, therefore, of the opinion that neither the AAC nor the Tribunal were correct in taking the view that this question of reduction or waiver of penal interest could not be considered, since it was raised by the assessee for the first time before the AAC.

As a result of the above discussion, it follows that questions Nos. 5 and 6 have to be answered in the affirmative and against the assessee, but question No. 7 has to be answered in the negative and in favour of the assessee

Consequently, the reference is answered as follows :

Questions Nos. 1, 2, 4, 5, 6 and 8 are answered in favour of the Revenue and against the assessee by holding that the view taken by the Tribunal on these points is justified. Questions Nos. 3 and 9 do not arise and, therefore, require no answer.

Questions Nos. 7 and 10 are answered in favour of the assessee and against the Revenue by holding that the view of the Tribunal on these points is not justified.

[Citation : 171 ITR 47]