COMMISSIONER OF INCOME TAX Vs. FORBES EWART AND FIGGIS LTD
LAWS(KER)-2003-4-24
HIGH COURT OF KERALA
Decided on April 08,2003

COMMISSIONER OF INCOME TAX Appellant
VERSUS
Forbes Ewart And Figgis Ltd Respondents

JUDGEMENT

G.SIVARAJAN,J. - (1.) THE Tribunal, Cochin Bench, has referred the following two questions of law under Section 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 Section 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 Section 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 ?'
(2.) 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 Section 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 -section (1) of Section 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 Section 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 Section 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 Section 80HHC of the Act. The senior counsel also relied on the decisions of the Supreme Court in CIT v. Swadeshi Cotton and Flour Mills (P) Ltd. : [1964]53ITR134(SC) , Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT : [1997]227ITR172(SC) and Indian Overseas Bank Ltd. v. CIT : [1970]77ITR512(SC) .
(3.) THE learned counsel appearing for the respondent -assessee on the other hand submitted that Section 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 Section 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 Section 80HHC(1) of the Act. The counsel also referred to the decisions of the Andhra Pradesh High Court in Veerabhadra Iron Foundry and Anr. v. CIT : [1968]69ITR425(AP) and of the Rajasthan High Court in CIT v. Mazdoor Kisan Sahkari Samiti 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 v. Sri Venkatesa Mills Ltd. : [1999]235ITR665(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.;


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