The Hindu Business Line : Invalidity in focus

INCOME-TAX law has a provision dealing with invalid returns (Section 139(9)), and this was tested before the Mumbai High Court in the Flotech Welding and Cutting Systems Ltd vs Chandersingh case.

Due diligence blues

The accounts of the company for the year ended March 31, 1992, were audited and the audit report was issued.

The shareholders of the company adopted the accounts in July 1992.

However, another company was interested in acquiring this company and, hence, they appointed another firm of chartered accountants to conduct the due diligence.

The due diligence revealed the fact that the profits in the audited accounts were way beyond what they should have been. The tax audit report for the year in question stated the fact that the auditors had considered the due diligence report.

Those were the days when the return of income could be filed after Christmas, and the company duly filed a return on December 30 declaring a loss.

Accompanying this return were the audited profit and loss account and balance-sheet apart from the tax audit report and the computation of income reworked as per the findings of the due diligence.

Appeal after appeal

On February 11, 1993, the company got an invitation from the Deputy Commissioner of Income-Tax informing that he intended to treat the return as invalid since the balance-sheet and profit and loss account did not tally with the findings of the due diligence. Fifteen days was given to the company to "cure the defects".

The assessing officer (AO) treated the return as invalid by an intimation dated March 30, 1993. This probably woke up the company, which replied on March 31, 1993, that once the accounts have been adopted by the shareholders, it would not be possible to alter them.

The company also explained that the defects pointed out in the due diligence report were considered in the computation of income and necessary accounting entries were passed in the books of account for the year ended on March 31, 1993.

It appears that the intimation from the Department and the reply of the company met at the post office and were received by each party a bit too late and, hence, the company had no resort but to knock on the doors of the Commissioner (Appeals).

He did not burn too much midnight oil and concurred with the findings of the AO. The hand of law brought the company to the Tribunal, which ruled that Section 139(9) did not envisage passing of an order, an un-rectified defect would render the return non-est in law and the AO is duty bound to correct the defects.

The reference application against this was pending before the Tribunal. Losing patience, the company approached the Mumbai High Court.

At the High Court

In a marked departure from the trend, the Mumbai High Court admitted the petition although a reference application was pending before the Tribunal.

One of the reasons that made the court do this was the fact that both the appellate authorities had ruled that an order under Section 139(9) cannot be appealed against.

Seeing some light at the end of the tunnel, the company withdrew the reference application in the Tribunal.

The company did not budge from its stance — the accounts were adopted and could not be amended, the effect of the report was given in the computation and the accounting entries were passed in the period ended on March 31, 1993.

The Department stuck to its guns — the defects were not cured and the appeal against an order under Section 139(9) was not maintainable as was held in the Gopal Glass Works (P) Ltd vs CIT (2001 252 ITR 354) case.

Just do it

The court ruled that the company had attached all necessary and requisite documents with the return of income and, hence, the return of income could not be treated as defective.

There could be a plethora of reasons why the profit as per the profit and loss account and the income reflected in the computation of income would differ — deferred revenue expenditure and accounting for interest are some examples.

The Gopal Glass works case would not fit this case because there the company decided to give the tax audit report a skip and did not seek extension of time to file it too.

The court directed the assessing officer to finalise the assessment order.

In a reminder to the AO, the court reminded him that after the return was treated as invalid, he issued a notice under Section 143(2) requisitioning presence of the company with account et al.

Subsequently, he has not passed any assessment order merely because there was no positive income.

The AO would have done well to take the cue from two decided cases — a defective return is not ipso facto an invalid return (National Insurance Co. Ltd vs CIT — 1995 213 ITR 862 Calcutta) and even a defective return has to result in an assessment (UP State Sugar Corporation Ltd vs CIT — 1995 202 ITR 93 Allahabad).

When so much can be done/undone these days before, during and after assessment, do we need a section for invalid returns?

(The author is a Hyderabad-based chartered accountant.)