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Saturday, Oct 05, 2002

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The argument continues

T. N. Pandey

T. N. Pandey on the wasteful proliferation of litigation

IT IS AN common knowledge that in most of the court cases in the country, the Government is the major litigant.

A similar trend is seen in direct tax cases too, where the Income-Tax (I-T) Department is the appellant in nearly 80 per cent of the appeals before the Income-Tax Appellate Tribunal (ITAT).

There are various reasons for this state of affairs concerning I-T appeals. Broadly, they include:

  • Lack of attention and inadequate homework by assessing officers at the initial stages when assessments are framed;

  • Too much obsession with the interests of the Revenue;

  • Filing of appeals in a routine manner, considering merely the revenue impact without taking into account the factual and legal weaknesses in the case;

  • Non-review of the pending appeals for withdrawing the same, especially when apex court decisions settle the law.

    There have been many cases that have dealt with such non-review, a recent one being the Calcutta High Court decision in CIT vs Berger Paints Ltd (No. 2 2002 170 Taxation 95 Calcutta).

    The issue taken up by the CIT before the High Court was whether the claim of an assessee for an expenditure to be allowed as revenue in computing the taxable income can be rejected merely on the ground that the assessee had treated the expenditure in its accounts as capital and not debited it to the profit and loss (P&L) account.

    The law on this issue has long been settled by two Supreme Court and a number of High Court decisions. Still the appeal was argued by the I-T Department before the Calcutta High Court on the ground that the entry made by the assessee in its account books treated it as capital expenditure.

    In CIT vs India Discount Co. Ltd (1970 75 ITR 191 SC), the Supreme Court has said that the fact that an assessee treats a certain amount as current assets on revenue account or the fact that the assessee offers a part of the amount on revenue account would not be decisive or conclusive.

    It is well established that a receipt which in law cannot be regarded as income cannot become so merely because the assessee erroneously credited it to the P&L account. It may, therefore, be said that the true nature of an amount must be found out by discovering the true nature of the amount in question (see also the decision in CIT vs Shoodi Vallabhadas and Co. — 1962 46 ITR 144 SC).

    Similarly, in the Kedarnath Jute Manufacturing Co. Ltd vs CIT (1971 82 ITR 363 SC) case, the apex court once more reiterated the earlier view.

    It emphasised that whether an assessee was entitled to a particular deduction or not depended on the provisions of the law relating thereto and not on the view that the assessee might take of his rights; nor could the existence or absence of entries in the books of account be decisive or conclusive in the matter. The court observed thus:

    "We are wholly unable to appreciate the suggestion, that if an assessee under some misapprehension or mistake fails to make an entry in the books of accounts, the assessee will lose the right of claiming or will be debarred from being allowed that deduction.

    "Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter."

    There are a number of High Court decisions on this issue but it is not necessary to mention these especially after the Supreme Court has settled the law.

    These two apex court decisions are considered law for the proposition that what assessees write in the books of accounts is not relevant for deciding the issue relating to admissibility of an expenditure as a revenue. The Kedarnath Jute decision has gone to the extent of stating that even without an entry in the accounts, a claim can be raised in the relevant year if it relates to the said year.

    The issue that arises is whether the Department should go on agitating this issue or pursue appeals which are pending even when the law has been settled by the apex court and there has been no amendment to the law to undo the apex court decisions which, in terms of Article 141 of the Constitution, has become the law? Prima facie, the Department is unjustified in wasting taxpayers' money and its own time and energy in pursuing such cases and unnecessarily proliferating litigation.

    It time, therefore, that all such appeals were reviewed and withdrawn forthwith.

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