The Hindu Business Line : There's no justification for things to be complex when they could be simple

ON MAY 5 the Delhi High Court gave its decision in an out-of-the-ordinary case: Central Warehousing Corporation case versus Secretary, Department of Revenue, Ministry of Finance, Government of India; Chairman, Central Board of Direct Taxes (CBDT), Ministry of Finance; Chief Commissioner of Income Tax (CCIT) and Joint Commissioner of Income Tax (JCIT), Special Range 14.

The story began when Central Warehousing Corporation (CWC) filed a return for the assessment year 1998-99. The JCIT responded through a letter written in October 2000 that given the nature and complexity of accounts and the interest of the Revenue, he was of the opinion that CWC was a fit case for audit under Section 142 (2A) of the Income-Tax Act. That was the trigger.

Section 142 (2A) is about `inquiry before assessment'. It reads: "If, at any stage of the proceedings before him, the Assessing Officer (AO), having regard to the nature and complexity of the accounts of the assessee and the interests of the revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant."

Accordingly, the JCIT directed CWC's accounts to be audited by Jain Kapila Associates. His letter made a special reference as to whether the business activities carried on by CWC in the CFS/ICD stations are covered by Section 11 of the Warehousing Corporation Act. CFS is Container Freight Station and ICD, Inland Clearance Depot, and under these, CWC performed the following activities: "Receipt and dispatch of containerisable export cargo; stuffing/destuffing and aggregation/delivery of import cargo; custom clearance and examination of export cargo; safe and scientific storage of valuable cargo and containers; and storage of destuffed cargo."

No accounts were ever examined!

In November 2000, CWC wrote to the CBDT and the CCIT, requesting for cancellation of the order to audit. When nothing favourable happened, CWC knocked the doors of the High Court, filing a writ petition under Article 226 of the Constitution, requesting for quashing the AO's October 2000 order.

CWC argued that the accounts are in no way complex so as to justify appointment of a special auditor. CWC also contended that CFS/ICD income was exempted under Section 10 (29) of the Act. (As it stood till getting knocked off by the Finance Act, 2002, this provision exempted income "in the case of an authority constituted under any law for the time being in force for the marketing of commodities, any income derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities.") CWC said that it was carrying on similar activity all these years and that no accounts were ever examined; there was, therefore, no justification whatsoever in passing the impugned order, protested the Corporation.

What did the Department have to say? It said that CWC was claiming exemption under Section 10(29) that it was an authority constituted under the law for marketing of commodities, but that the extent of exemption had been a matter of dispute. "It requires to be looked into by the authorities whether the exemption is permissible to the Corporation, as exemption is admissible only to certain incomes. Even if part of the income of the Corporation falls within that exemption, its extent must be examined so as to correctly determine the receipts on the general principles of assessment," said the Department.

It informed the court that CWC was unable to provide break-up of receipts and expenses, though the volume of accounts was huge.

Consolidated P&L Account

Something interesting had happened the earlier year, AY 1997-98. CWC was dealing in "87 items of commodities including alcohol, cigarettes, air-conditioners, refrigerators, arms and ammunitions and other luxury items" but could not produce evidence to show that these commodities were exempt from tax. Gross turnover was Rs 238.68 crore and net profit stood at Rs 8.94 crore, but there were no separate P&L accounts for warehousing and CFS/ICD business.

So, the AO had allocated expenses pro rata. However, the 1998-99 return showed a loss of Rs 154.64 crore, even as turnover was Rs 253.31 crore, and the consolidated P&L, where the losses of one activity were set off against the profits of the other, wrapped up with a net profit of Rs 67.72 crore.

Hence the order under Section 142 (2A), reasoned the Department.

Justices Swatanter Kumar and Madan B. Lokur of the Delhi High Court heard the case and said that Section 142 (2A) clearly vests the power in the AO to direct the assessee to get the accounts audited by an accountant.

Scope of judicial review of such an opinion of the AO would fall within a very limited jurisdiction, as the AO was the best person to form an opinion, the court pointed out.

Text of the judgment cites cases such as Rajesh Kumar Prop Surya Trading vs Deputy Commissioner, Income Tax on the meaning of `accounts'; JCIT vs ITC Ltd where special audit was justified because the company had 43 branches all over the country and had added Rs 81.42 crore to the plant and machinery, Rs 2.5 crore to motor vehicles, Rs 14.86 crore to land and Rs 6.69 crore to building; Pani Devi vs Union of India, that the power vested in the AO to direct special audit was over and above the general audit; and Gurunanak Enterprises and Bhagya Rekha Enterprises vs Commissioner of Income Tax, where the court had explained the twin conditions in Section 142(2A), viz., complexity of accounts and the interest of the Revenue.

Inexplicable prejudice

CWC's argument that its accounts were duly audited and were counterchecked by the Comptroller and Auditor General of India's nominee would no way further the cause of CWC, reasoned the judges. The AO's order of special audit was not arbitrary, said the court, because CWC had failed to bifurcate the numbers, despite being asked to do so by the AO.

"We are unable to appreciate what prejudice the petitioner/corporation has suffered as a result of the impugned order," wondered the court. To add to CWC's woes, the court could not find any evidence that the AO lacked objectivity or that his order was not in consonance with the principles enunciated in Section 142(2A). "I worked in a pet store and people would ask how big I would get," rued Rodney Dangerfield. In contrast, the CWC case is about how small a big storehouse can end up in our perception owing to its pet peeves about audit and taxman. After all, as Edward de Bono remarked, "There is never any justification for things being complex when they could be simple." Perhaps, the ICAI should study the past accounts of CWC, as a public service.

Mushroom at the end of a smoking gun

LITIGATION mushrooms, we're told, but here's a case of mushrooms going to tax tribunal. Premier Mushroom Farms put white button mushrooms in brine and sought to classify the product under the head `Edible vegetables and certain roots and tubers' (Chapter 7). Not admissible, said the excise officials because, to them, the product looked like `Preparations of vegetables, fruit, nuts or other parts of plants' (Chapter 20). Earlier, the Bangalore tribunal had decided that `provisionally preserved' mushrooms would come under the first head. Since there was a contrary ruling from a different tribunal, the matter came up before a larger bench of the Delhi tribunal. A popular quote by Condoleezza Rice, US Secretary of State, on Iraq is, "We don't want the smoking gun to be a mushroom cloud." How about smoked mushroom, or a cooked one, wondered the taxman, probably, because he argued that Premier's product was `elaborately processed'. Label on the packing indicated a shelf life of four years; the item was, therefore, "Preparation of vegetable and not vegetable as such," contended the Department. Cooking doesn't shift from one head to another, reasoned the tribunal. It noted that Chapter 20 covers only products prepared or preserved by processes other than merely chilled or frozen, or put in provisional preservative solution, or dried, dehydrated or evaporated; these exclusions went to Chapter 7. On the `provisionally preserved' point, both Premier and the Department had sought expert opinion that concurred in the affirmative. Premier can well afford to sing John Ford's line, "I am... a mushroom; on whom the dew of heaven drops now and then."

Tailpiece

"Does amend mean keep a-mending or a-meddling?"

"Amen!"

Detaxification@TheHindu.co.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A road for private sector

A timely note by ICAI

There's no justification for things to be complex when they could be simple

Let's not mistake change for progress

Laxity in tax compliance

BHEL disinvestment

Audit objections and reopening of assessment

We are using resources 21 per cent faster than Earth can renew them

Sticklish issues