Vildirect: IncomeTax-caselaws-1997-VIL-95-ITAT-AHM

1997-VIL-95-ITAT-AHM

Equivalent Citation: TTJ 059, 001,

Income Tax Appellate Tribunal AHMEDABAD

Date: 17.04.1997

DEPUTY COMMISSIONER OF INCOME TAX (ASSESSMENT).

SAMIR DIAMOND MANUFACTURING (P) LTD.

BENCH

Member(s) : NATHU RAM., H. L. KARWA.

JUDGMENT

These are the appeals preferred by the Revenue against the orders of the first appellate authority for the asst. yrs. 1989-90 and 1990-91. Since the assessee involved is common, these appeals have been heard together and are being decided by this consolidated order.

2. We first take up the Revenue appeal for the asst. yr. 1989-90 in ITA No. 792/Ahd/1992. The first ground raised by the Revenue is against allowing depreciation as per IT Rules while computing income under s. 115J of the IT Act. The facts in brief are that the assessee filed a return declaring income at Rs. 3,88,250. The account year of the assessee was for a period of 21 months being the transitional year from 1st July, 1987 to 31st March, 1989. The assessee made up the account separately for the period from 1st July, 1987 to 30th June, 1988 and from 1st July, 1988 to 31st March, 1989. The assessee while computing the income for the second period claimed deduction under s. 80HHA at Rs. 6,00,397 and under s. 80-I at Rs. 7,50,496. The assessee also gave working of book profit as per s. 115J at Rs. 12,94,169 and taxable profit at 30 per cent thereof was shown at Rs. 3,88,251.

2.1 The AO while completing the assessment under s. 143(3) rejected the claim made under ss. 80HHA and 80-I and assessed the total income of Rs. 17,23,760. The first appellate authority restored the matter relating to deduction under ss. 80HHA and 80-I to the AO for fresh adjudication. As a consequence to the direction given by the CIT(A) the AO while completing the set aside assessment allowed the deduction claimed under ss. 80HHA and 80-I and assessed the total income under s. 143(3) at Rs. 3,72,870.

2.2 Simultaneously the AO also computed the book profit as per s. 115J at Rs. 38,25,864 and this book profit was arrived at on disallowing the depreciation charged at the rate prescribed under the IT Act and rules thereunder over that prescribed in Sch. XIV of the Companies Act of Rs. 25,31,694 as per details below:

.	Rs.
For the period from 1st July, 1987 to 30th June, 1988	10,00,268
For the period from 1st July, 1988 to 31st March, 1989	15,31,426

30 per cent of the book profit worked out to Rs. 11,47,780 and that was adopted as taxable income under s. 115J of the IT Act being more than that assessed under s. 143(3) of IT Act.

3. On appeal, it was contended on behalf of the assessee that book profit has been computed as per the provisions of s. 115J(1A) read with provisions of Parts II and III of Sch. VI of the Companies Act. It was contended that Part III of Sch. VI of the Companies Act stipulates the information that should be covered by P&L a/c. Part III also requires to provide for depreciation, etc. It was claimed that Part III does not lay down the rate of depreciation and it also does not speak of Sch. XIV to the Companies Act which lays down the rate for depreciation for calculation of managerial remuneration. It was also contended that auditors in their report have not made any statement that the P&L a/c-has been prepared otherwise than in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act. It was also explained that Sch. XIV prescribes the minimum rate of depreciation which must be provided for the purpose of managerial remuneration. It was also claimed that s. 35 of the Companies Act provides for depreciation at the rate prescribed under Sch. XIV but the same is not applicable to a private limited company unless it is subsidiary of a public company as per s. 355 of the Companies Act. The assessee-company being a private company the rates of depreciation prescribed in Sch. XIV under s. 350 are not attracted by virtue of s. 355 of the Companies Act. It was also claimed that the Company Law Board in their Circular No. 12 of 1989, dt. 7th March, 1989 has clarified that the rates contained in Sch. XIV should be viewed as the minimum rate and the company can charge even higher rates of depreciation. It was, therefore, contended that the assessee-company was fully justified in claiming depreciation as per the IT Rules instead of the rates prescribed in Sch. XIV to the Companies Act while computing the income under s. 115J.

3.1 The CIT(A) agreeing with the arguments advanced on behalf of the assessee allowed the depreciation as per IT Rules in computation of the book profit under s. 115J with the following observations:

"I have considered the fact and the appellant's submissions. It is relevant to note that sub-s. (1A) of s. 115J stipulates that a company would prepare its P&L a/c-in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956. Moreover, as pointed by the appellant, ss. 348 to 354 of the Companies Act relating to ascertainment of depreciation deal with the remuneration of managing agents. It is also the appellant's contention that as per s. 355, the provisions of ss. 348 to 354 are not applicable to a private company and that the appellant is a private company. Besides, it is contended that the Companies Act and its Schedules do not debar a company for providing for a higher rate of depreciation. It is the appellant's contention that it has provided for depreciation at the rates prescribed as per the IT Rules, 1962. Considering all the relevant facts and the appellant's submissions, it is held that the appellant's action in providing for the depreciation at the rates prescribed under the IT Rules, 1962, is legally valid and proper. Moreover, it is held that the appellant's action in providing for depreciation at the rates prescribed under the IT Rules, 1962, cannot create any notional reserve within the meaning of Expln. to sub-s. (1A) of s. 115J. Considering the facts and the appellant's submissions discussed above, the AO is directed to compute the book profit under s. 115J by allowing the depreciation as per the IT Rules, 1962."

The Revenue has challenged the finding so given by the first appellate authority in the present appeals before us.

4. The learned Departmental Representative has relied upon the order of the AO heavily. He has further submitted that book profit is to be computed as per Companies Act and accordingly, the depreciation at the rate prescribed in Sch. XIV of the Companies Act is to be charged and not the higher rates of depreciation as provided in IT Rules. The auditors of the company in their report have brought out the fact of overcharging of depreciation as per the rate prescribed in IT Rules compared to those provided in Sch. XIV to the Companies Act and accordingly, the AO was fully justified in restricting the allowance of depreciation as provided in Sch. XIV to the Companies Act while computing the book profit under s. 115J.

5. The learned counsel for the assessee, on the other hand, reiterated the submissions made before the lower authorities and further submitted that the assessee-company has been charging and claiming depreciation at the rate prescribed under the IT Rules from the very inception of the company. He pointed out that before June, 1988, s. 350 of the Companies Act provided for depreciation at the rate specified for the assets in the IT Act and rules made thereunder. However, with the amendment of 1988 the rates of depreciation were prescribed in Sch. XIV of the Companies Act and with this amendment the rates of depreciation under the Companies Act were delinked from those provided in IT Rules. The assessee-company even after the amendment continued to provide depreciation at the rate prescribed under the IT Rules. By charging depreciation at the rate prescribed under the IT Rules the assessee-company charged more depreciation by Rs. 10,00,268 and Rs. 15,31,426 respectively for the account year ended on 30th June, 1988 and 31st March, 1989. The auditors of the company in the audit report made a remark to the effect that had the depreciation been provided at the rate prescribed under Sch. XIV the net profit would have been higher by Rs. 25,31,694. Such remarks were made by the auditors as per requirements of the Companies Act.

5.1 The learned counsel has further submitted that Sch. XIV to the Companies Act provides minimum rates of depreciation so that the dividend is not declared out of the capital and managerial remuneration is not paid excessive without providing for depreciation. The object of enacting Sch. XIV is that the company does not resort to window-dressing for the purpose of declaring dividend and calculation of managerial remuneration. The learned counsel also referred to Company Law Board Circular dt. 7th March, 1989 about the provisions of Sch. XIV wherein it was clarified that the rate prescribed in Sch. XIV should be viewed as the minimum rate and the company shall not be permitted to charge depreciation at rates lower than those specified in the Schedule. However, if on the basis of bona fide technological valuation the higher rates of depreciation are justified they may be provided with proper disclosure by way of notes forming part of annual accounts. The learned counsel has further submitted in this context that the machinery used by the assessee in diamond polishing are short-lived and not standardised. There is great scope for invention of diamond polishing machines. The assessee at the first instance installed manually polishing machines and thereafter purchased semi-automatic polishing machines. Automatic machines for diamond polishing have since been invented and brought to use in other countries. This technological change is bound to reach our country also. The board of directors, therefore, decided to charge depreciation at the rate prescribed in the IT Rules as provision of depreciation as per rates prescribed in Sch. XIV would have been inadequate and insufficient. The learned counsel has, therefore, pleaded that depreciation claimed as per IT Rules while working out the book profit which is higher than those provided in Sch. XIV is fully justified and in support he also placed reliance on the decision of the Tribunal in the case of Modern Woollen Ltd. vs. Dy. CIT (1994) 47 ITD 154 (Bom) wherein the Bombay Bench upheld the action of the company in providing depreciation at higher rate prescribed in IT Rules than those prescribed in Sch. XIV to the Companies Act. It is claimed that the case of the assessee-company is better placed as compared to that cited above in the sense that the assessee is a private limited company where s. 350 of the Companies Act prescribing rates of depreciation in Sch. XIV is not applicable.

6. We have given careful consideration to the facts, material on record and rival submissions made before us. We note that s. 115J of the IT Act contains special provision relating to certain companies for tax purpose. It is laid down in cl. (i) of s. 115J that where the total income as computed under the IT Act in respect of relevant assessment year is less than 30 per cent of its book profit the total income of such assessee chargeable to tax shall be deemed to be an amount equal to 30 per cent of such book profit. Clause (1A) further provides that every assessee-company shall prepare its P&L a/c-in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act for the purposes of s. 115J. Further, Explanation below the above clauses defines book profit which required addition of certain items in the profit and reduction of certain items therefrom to arrive at a book profit. The assessee-company as per the procedure prescribed in s. 115J worked out the book profit at Rs. 12,94,169, 30 per cent of which comes to Rs. 3,88,250. The assessee-company also worked out the taxable income under the normal provisions of the Act at Rs. 3,88,250 and the same was disclosed in the return filed. The AO in set aside assessment computed the income of the assessee under the normal provisions of the Act at Rs. 3,72,870 and that being less than 30 per cent of the book profit worked out by the assessee at Rs. 3,88,250 the AO proceeded to compute the book profit under s. 115J. The AO noted from the report of the auditors that the assessee-company has overcharged depreciation by an amount of Rs. 25,31,694 for both the periods at the rate prescribed under the IT Rules instead of depreciation rate prescribed in Sch. XIV of the Companies Act. The AO, therefore, disallowed the depreciation so overcharged as per the report of the auditors of Rs. 25,31,694 and thus computed the book profit at Rs. 38,25,863 against the book profits computed by the assessee at Rs. 12,94,169. The short question that arises before us for decision is whether the assessee was required to charge depreciation at the rate laid down in Sch. XIV to the Companies Act while computing the book profit or it could charge higher rate of depreciation prescribed in IT Rules having regard to the technical evaluation of machinery used in diamond polishing. As mentioned above the assessee-company was required to prepare its P&L a/c in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act as per cl. (1A) of s. 115J and this was subject to certain adjustment as per Explanation thereunder. Part II of Sch. VI to the Companies Act requires disclosure after setting out various items of income and expenditure in the P&L a/c. Part III of Sch. VI to the Companies Act has interpreted certain expression such as 'provision', 'capital reserve', 'liability', etc., for giving treatment in working out the profit of the company. Thus both Parts III and II to Sch. VI to the Companies Act do not provide for rates of depreciation to be charged for the purpose of computing the book profit. It is claimed by the assessee that the book profit has been computed in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act. This has not been disputed by the Revenue nor there is any material brought on record to show that the P&L a/c has not been prepared in accordance with the provisions of Parts II and III of the Sch. VI to the Companies Act. Therefore, undisputedly the assessee-company has computed the book profit as per provisions of s. 115J(1A).

6.1 We find that the assessee company has been claiming depreciation at the rate prescribed in the IT Rules from the very inception. Sec. 249 of the Companies Act contains provisions relating to determination of net profit and cl. (k) of sub-s. (4) of s. 249 provides for deduction of depreciation to the extent specified in s. 350 of the Companies Act. Sec. 350 of the Companies Act earlier provided for depreciation at the rate prescribed under the IT Act and Rules framed thereunder. However, as per Companies Amendment Act, 1988 effective from 15th June, 1988, the words "at the rate specified for the assets in the Indian IT Act and the Rules made thereunder" were substituted by the words "at the rate specified in Sch. XIV". Sch. XIV thus delinked the rate of depreciation from the IT Act and it has retrospective effect from 2nd April, 1987. The provision is, therefore, applicable to all companies' account which commences after 2nd April, 1987. The assessee-company continued to provide for depreciation even after the amendment of s. 350 of the Companies Act at the rate prescribed under the IT Rules.

6.2 The background in which Sch.. XIV was brought in providing for rate of depreciation through the Companies (Amendment) Act, 1988 has been explained in the commentary "Guide to the Companies Act" by Ramaiya 12th Edn., 1992 at p. 891 which is reproduced hereunder:

"Changes made by the Amendment Act of 1988 (w.e.f. 15th June, 1988).

Earlier, while determining distributable profits for the purposes of declaring dividend, depreciation was required to be provided at the rates specified for the various assets by the IT Act by virtue of reference thereto to s. 350, which in turn was referred to in sub-s. 2(1) of this section. In the recent years, the depreciation rates under the IT Act having undergone steep upward revision, companies were not left with sufficient profits, after providing for depreciation to enable declaration of reasonable dividend by them to their shareholders. This section has, therefore, been amended by the Amendment Act of 1988 vide note 26 of Notes on clauses which reads as follows : 'This clause seeks to amend s. 205 to provide that, in future, depreciation shall be calculated in accordance with the rates specified in Sch. XIV to the Act, thus delinking depreciation under the Companies Act from that under the IT Act.....'

The amendment has the effect of delinking the provisions for depreciation required to be made for determining distributable profits for purpose of declaration of dividend vide s. 205, as also for determining net profits under s. 349 for computing the managerial remuneration."

It is thus evident that changes brought in rates of depreciation were intended to govern the computation of profit for distribution of dividend under s. 205 and computation of managerial remuneration under s. 249. It is relevant to note here that s. 348 lays down that remuneration of managing agent should not ordinarily exceed 10 per cent of net profit. It so appears that the scope of the depreciation rate prescribed in Sch. XIV is limited and this has been clarified in the Company Law Board Circular No. 2 of 1989 reproduced hereunder:

"1. Can higher rates of depreciation be charged?æ t is stated that Sch. XIV clearly states that a company should disclose depreciation rates if they are different from the principal rates specified in the Schedule. On this basis, it is suggested that a company can charge depreciation at rates which are lower or higher than those specified in Sch. XIV.

It may be clarified that the rates as contained in Sch. XIV should be viewed as the minimum rates, and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule. However, if on the basis of a bona fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual account."

It would be seen from the above that the rates of depreciation prescribed in Sch. XIV has been clarified to be only the minimum rate but higher rates are permissible on the basis of a bona fide technological evaluation of assets and after a proper disclosure by way of a note forming part of annual account. The assessee has claimed that on account of technological evaluation of the machinery used in diamond polishing the assessee-company decided to charge higher rate of depreciation provided in the IT Rules after the amendment made in s. 350 of the Companies Act providing for minimum rates of depreciation in Sch. XIV and proper and necessary disclosure of charging of such higher rates of depreciation as per IT Rules has been made by the auditors by way of a note forming part of its annual accounts. The conditions thus prescribed for charging higher rate of depreciation than those prescribed in Sch. XIV are, therefore, satisfied and the Revenue has not disputed the claim of the assessee in this behalf nor any material has been brought on record by the Revenue to prove to the contrary. In this view of the matter, we are of the opinion that the assessee-company was fully justified in charging higher rates of depreciation as per IT Rules without in anyway violating the provisions of Parts II and III of Sch. VI to the Companies Act, 1956. This view is fully supported by the decision of the Tribunal in the case of Modern Woollen Ltd. We also note that s. 355 of the Companies Act provides that ss. 348 to 354 shall not apply to a private company unless it is a subsidiary of a public company. Admittedly, the assessee is a private company and not a subsidiary of any public company. Therefore, s. 350 which prescribes rates for depreciation in Sch. XIV of the Companies Act also does not apply in the case of the assessee company in computation of its profit and accordingly the assessee-company is not under obligation or bound to charge depreciation at rates prescribed in Sch. XIV.

6.3 Having considered all the facts and circumstances discussed above we see no infirmity in the order of the first appellate authority and the same is upheld.

7. The second ground raised by the Revenue is as under:

"In the facts and circumstances of the case as well as law on the subject, the learned AO has erred in charging interest under s. 234B of Rs. 1,78,756 and Rs. 12,241 under s. 234C for default of advance tax as advance tax is not payable on basis of s. 115J as opined by learned jurist Shri N.A. Palkhiwala in his commentary at p. No. 1049."

As mentioned above the AO having found that income assessed under s. 143(3) is less than 30 per cent of the book profit he computed the book profit at Rs. 38,25,863 and 30 per cent thereof comes to Rs. 11,47,780 and was subjected to tax under s. 115J. The tax payable on such income was worked out at Rs. 6,62,842. He gave a credit for tax paid on 25th Feb., 1991 at Rs. 2,24,215 and the net tax payable remained at Rs. 4,38,627. The AO charged interest under s. 234B among others at Rs. 1,78,756. On appeal, the assessee objected to the interest so charged. It was claimed that provisions of advance tax are applicable only to the income determined on the basis of the regular assessment and not on income determined under s. 115J. Sec. 115J determines only a fictional income and it cannot form the basis for charge of interest under s. 234B. The first appellate authority on the given facts held that no interest under s. 234B can be charged on the basis of the income determined under s. 115J. He, however, observed that the assessee has been assessed on a positive income even under s. 143(3) which is regular assessment. He, therefore, directed the AO to charge interest under s. 234B on the basis of the total income under s. 143(3).

8. The learned Departmental Representative heavily relied upon the order of the AO and further submitted that character of the income deemed to be chargeable to tax under s. 115J would ultimately be the income assessed in accordance with the Act. The assessee was, therefore, required to pay the advance tax and the assessee having not paid the advance tax in full, interest under s. 234B has rightly been charged.

9. The learned counsel for the assessee on the other hand, advanced arguments in support of the order of the first appellate authority. He further submitted that advance tax is not payable on the basis of income computed under s. 115J as opined by the learned jurist Shri N.A. Palkhiwala in his commentary on p. 1049. He also cited the direct decision of the Tribunal on the issue in the case of Steel Authority of India vs. Dy. CIT (1991) 40 TTJ (Del) 559 : (1992) 38 ITD 193 (Del).

10. We have considered the facts and rival submissions. We find that the assessee computed the tax under the normal provisions of the Act at Rs. 3,88,250 and the income so computed was declared in the return filed. We also note that the assessee also computed the profit taxable under s. 115J at Rs. 3,88,250 being 30 per cent of the book profit computed at Rs. 12,94,169. As per the finding given by us above the profit computed under s. 115J would finally come to Rs. 3,88,250 whereas the income assessed by the AO under the normal provisions of the Act is at Rs. 3,72,870. There is thus a marginal difference in the income determined under s. 115J and that computed under the normal provisions of the Act. The first appellate authority has held the view that no interest is chargeable under s. 234B on the basis of the income determined under s. 115J. He, however, has directed the AO to charge the interest under s. 234B on the basis of the income assessed under s. 143(3) at Rs. 3,72,870. We find that the assessee has not challenged before us the direction given for charging of interest under s. 234B based on the income assessed under s. 143(3). The only question that arises before us is whether under s. 234B interest is chargeable on the basis of the income determined under s. 115J. It is an undisputed fact that the assessee had a positive income during the current year and the assessee was required to pay advance tax as per the relevant provisions of the Act on the estimated income. Sec. 115J purports to tax an amount by creating a legal fiction by which the total income is deemed to be 30 per cent of the book profit but such fiction does not extend beyond that. The fiction has thus been created for a definite purpose and it will not operate beyond its field. Moreover, unless the books of accounts are completed and book profits are determined one will not know as to whether he is liable to pay any tax under s. 115J. Moreover, liability to pay tax under s. 115J arises only if the total income as computed under the Act is less than 30 per cent of its book profit and such an eventuality is not known at the time when the advance tax is payable. In this view of the matter, we hold that the fiction created under s. 115J does not extend to the payment of advance tax under the relevant provisions of ss. 207 and 209 and accordingly, there was no liability to interest under s. 234B on the income determined under s. 115J. This view is supported by the Tribunal decision in the case of Steel Authority of India Ltd. We accordingly, uphold the finding given by the first appellate authority in this behalf.

11. We now take up the appeal of the Revenue for the asst. yr. 1990-91 wherein the only ground raised is as under:

"On the facts and circumstances of the case and in law, the learned CIT(A) was not correct in deciding that filing of unsigned audit report as required by s. 80HHC was proper compliance of the requirement of that section regarding filing of a report of an auditor along with the return, and in allowing relief to the assessee on that finding."

12. The facts in brief are that the assessee-company filed a return declaring an income of Rs. 15,02,733 and in the income so computed the assessee claimed deduction under s. 80HHC at Rs. 4,96,894. The AO processed the return under s. 143(1)(a) and accepted the income returned. Consequently, on going through the record the AO found that the audit report was unsigned and undated. According to the AO, this defect made the report non est. Sec. 80HHC(4) provides that such report be filed with the return. The AO, therefore, held the view that deduction as claimed is prima facie not admissible. He, therefore, withdrew the claim made under s. 80HHC by an order passed under s. 154 of the Act and the income was finally determined at Rs. 19,99,630 against the income declared and accepted earlier at Rs. 15,02,733. On appeal, it was contended that the claim was withdrawn under s. 154 without giving any opportunity to the assessee of being heard. It was also claimed that s. 80HHC(4) stipulates that deduction under sub-s. (1) would be allowable only if the assessee furnished a report from the Chartered Accountant but it nowhere provides that only signed copy of the report has to be submitted along with the return. With the filing of the requisite report along with the return the assessee complied with the condition prescribed in sub-s. (4) of s. 80HHC. It was also contended that the return of income was duly signed and verified and the signatory of the return had solemnly declared that information given in the return and the annexure and statement thereto is correct and complete and the amount of total income and other particulars shown therein are truly stated. Merely because the report was unsigned the assessee cannot be deprived of the deduction under s. 80HHC. The first appellate authority allowed the deduction under s. 80HHC with the following observations:

"I have considered the facts and the appellant's submissions. As per the provisions of sub-s. (4) to s. 80HHC, deduction under s. 80HHC(1) is allowable only if the assessee furnishes the Chartered Accountant's relevant report along with the return of income. The AO has not disputed the fact that the appellant had filed the Chartered Accountant's said report along with the return of income. However, the only objections raised by the AO is that the appellant had filed the unsigned copy of the said report. It is relevant to note that the appellant cannot be deprived of his lawful claim otherwise allowable under s. 80HHC(1) on the ground that chartered Accountant's report filed along with the return of income was unsigned. It is the appellant's contention that the appellant had kept the signed copy of the Chartered Accountant's report with itself and that the appellant had filed the unsigned copy with the return of income. The AO has not doubted the veracity or the genuineness of the copy of the Chartered Accountant's report filed along with the return of income. Moreover, it is relevant to note that s. 80HHC(4) does not lay down that only a signed copy of the Chartered Accountant's report has to be enclosed with the return of income. Considering the totality of the facts and the appellant's submissions, it is held that the assessee's claim under s. 80HHC(1) cannot be disallowed on the ground that the appellant had enclosed the unsigned copy of the Chartered Accountant's report along with the return of income. Accordingly, it is held that the appellant's claim under s. 80HHC allowed under s. 143(1)(a) has been wrongly withdrawn by the impugned order passed under s. 154. Accordingly, the AO is directed to allow the deduction under s. 80HHC to the appellant."

13. The learned Departmental Representative advanced arguments in support of the order of the AO. He also submitted that the audit report having not been signed and dated was non est and that amounted to having not filed any such report along with the return. The condition prescribed for deduction under s. 80HHC is, therefore, not satisfied and the AO has rightly withdrawn the claim allowed under s. 143(1)(a). He also placed reliance on the decision in the case of Perfect Pottery Co. Ltd. vs. CIT (1996) 135 CTR (MP) 190 : (1996) 221 ITR 210 (MP) wherein disallowance of investment allowance made by way of order under s. 154 was held justified.

14. The learned counsel for the assessee on the other hand, reiterated the arguments advanced before the first appellate authority. He also placed reliance on the following decisions :

(a) Lakhanpal National Ltd. vs. Dy. CIT (1996) 135 CTR (Guj) 150 : (1996) 222 ITR 151 (Guj);

(b) SRF Charitable Trust vs. Union of India & Ors. (1991) 100 CTR (Del) 160 : (1992) 193 ITR 95 (Del);

(d) JKs Employees Welfare Fund vs. ITO (1992) 107 CTR (Raj) 161 : (1993) 199 ITR 765 (Raj); and

(e) Modern Fibotex India Ltd. & Anr. vs. Dy. CIT & Ors. (1995) 126 CTR (Cal) 69 : (1995) 212 ITR 496 (Cal).

The learned counsel also submitted that before passing the order under s. 154 withdrawing the claim under s. 80HHC the assessee was not given any opportunity of being heard and the same being against the principles of natural justice and against the statutory requirement of sub-s. (3) of s. 154 the order made under s. 154 is vitiated and is invalid. Moreover, the assessee is otherwise entitled to deduction under s. 80HHC and this fact has not been disputed by the AO. The assessee also filed a copy of the report required in the prescribed proforma along with the return and accordingly, the reduction claimed was apparently admissible and it could not validly be withdrawn under s. 154. If the report was unsigned the AO could question the assessee thereon by issue of a notice under s. 143(2) but the claim made could not be disallowed by way of adjustment under s. 143(1)(a) nor it could be withdrawn by resort to s. 154. He, therefore, placing reliance on the above decisions contended that the first appellate authority has rightly held the claim as admissible and the same required no interference.

15. We have considered the facts and rival contentions. As mentioned above the assessee claimed deduction under s. 80HHC in the return filed and also furnished audit report in the prescribed proforma as required under sub-s. (4) of s. 80HHC along with the return. It is not disputed that the audit report filed was not signed. The question that arises here is whether the claim made under s. 80HHC could be disallowed by way of adjustment under s. 143(1)(a). The first proviso to s. 143(1)(a) authorises the AO to make adjustment in the income returned on account of the following:

(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 basis of the information available in such return, accounts or documents, is prima facie, inadmissible, shall be disallowed.

According to (iii) above deduction claimed could be disallowed if on the basis of information available in the return accounts or documents it is prima facie inadmissible. In the present case, the assessee otherwise satisfied the condition prescribed for claim of deduction under s. 80HHC. The claim has not been disputed by the AO on merits. The assessee also filed along with the return an audit report as required under sub-s. (4) of s. 80HHC which reads as under:

"(4). The deduction under sub-s. (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income the report of an accountant, as defined in the Explanation below sub-s. (2) of s. 288, certifying that the deduction has been correctly claimed on the basis of the amount of export turnover."

It would be seen from the above provision that it nowhere requires that the audit report filed should be signed and accordingly, it cannot be said that requirement of sub-s. (4) was not complied with when the assessee filed copy of the said report along with the return. Moreover, if the report was defective in anyway being not signed the AO could have got the defect removed as per provisions of sub-s. (9) of s. 139 but the AO could not disallow the claim made under the shelter of said defect in the audit report. In this view of the matter, we are of the opinion that the said claim made under s. 80HHC could not be disallowed by way of adjustment under s. 143(1)(a) of the Act.

15.1 Further having accepted the return where the deduction under s. 80HHC was claimed whether the AO was justified in withdrawing the claim by resort to s. 154? It appears from the orders passed under s. 154 that the AO has not afforded any opportunity to the assessee of being heard before the order was passed withdrawing the claim. It would be worthwhile to reproduce hereunder sub-s. (3) of s. 154 of the IT Act:

"(3) An amendment, which has the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the assessee, shall not be made under this section unless the authority concerned has given notice to the assessee of its intention so to do and has allowed the assessee a reasonable opportunity of being heard."

It would be seen from the above sub-section that order under s. 154 which had the effect of enhancing of assessment or increasing the tax liability of the assessee could not be made unless the AO had given a notice to the assessee of his intention so to do and has allowed the assessee an opportunity of being heard. The AO had neither given a notice of his intention to make the amendment in the assessment order by way of withdrawal of the deduction claimed nor has he given reasonable opportunity of being heard on the issue before the order under s. 154 was passed. The order passed under s. 154 was thus in violation of the statutory requirement and also against the principles of natural justice and accordingly, it cannot be held as a valid order.

15.2 As regards the merits of the claim we find that the assessee earned profit from export business and the assessee was entitled to deduction under s. 80HHC having satisfied various conditions. The assessee also furnished audit report as required along with the return. On the basis of such information available in the return and accounts and statements filed therewith the deduction under s. 80HHC was prima facie admissible to the assessee. Whether the audit report filed with the return should be signed or not is a debatable issue and deduction already allowed cannot be withdrawn by resort to s. 154 of the IT Act.

15.3 The facts in the case of Perfect Pottery Co. Ltd. on which the learned Departmental Representative has placed reliance are that the assessee was not entitled to investment allowance under s. 32A having not satisfied the required conditions and as such rectification made to disallow the investment allowance was held justified. The facts of that case are distinguishable from those of the assessee and the ratio of that decision is not applicable to the controversy involved in the present case. On the other hand, ratio of decision relied on by the learned counsel for the assessee supports the claim of the assessee.

15.4 Having regard to all the facts and circumstances discussed above, we see no infirmity in the order of the first appellate authority and the same is upheld.

16. In the result, the Revenue appeals for both the asst. yrs. 1989-90 and 1990-91 are dismissed.

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