Interpreting the Income Tax Act

The interpretation of taxing statutes has occupied a distinct area of our jurisprudence. Strict interpretation of tax laws in contradistinction to liberal interpretation of other branches of law like welfare legislations is the accepted pattern. May be in the not so distant times, we will have judges revisiting the premise. Dealing with this branch at the twin states, High Court now for a while has been the bench of Justice L Narasimha Reddy and Justice C Kodandaram (who did command substantial work in this branch).

The bench dealing with Section 143 of the Income Tax Act the bench, speaking through Justice Narasimha Reddy said, “Section 143 of the Act provides different modes of disposals that can be given to the returns filed by the assesse. If the assessing officer feels that by and large the particulars mentioned in a return are not debatable and are acceptable prima facie he just gives an intimation in that behalf. Though such intimation is bereft of any discussion and reasons it constitutes for all practical purposes an order of assessment giving a finality to the returns. Where however he entertains a doubt to the accuracy of figures or correctness of the claims of the assesse, he is conferred with the power to issue notice to the assesse requiring him to explain on these aspects. It is axiomatic that the procedure under Section 143 (1) (a) of the Act cannot be resorted to, once there is any disagreement or controversy viz a viz the details of the returns.”

In a system where procedural safe guards are paramount, it is only expected that the supervision of the court is hawkeyed. In a system of multilayered supervisions, the bench ensured that the authorities followed the intent of the law as designed by Parliament. The bench rejected an appeal by the revenue. The assesse had claimed deduction of profit from export business. The bench pointed out that the authority was under an obligation to ascertain the views of the assesse once the claim becomes doubtful or debatable.

"It is a different matter that the assessing officer may or may not agree with the remarks or explanation that may be offered. The procedure under the law must be followed before any part of such claim is disallowed,” the bench reasoned while dealing with the appeal of the commissioner.

In yet another case dealing with exercise of the power under Section 143 where notices were issued, the bench declared, “The view taken by the assessing officer that the partnership firm must explain the source of income for the partners regarding the amount contributed by them towards the capital of the firm cannot be sustained.”

The bench was dealing with another appeal by the revenue. It was a case where the principal controversy dealt with the source of the contribution made by the partners in the business of sale and purchase of arrack.

The bench noticed that the assesse firm had ten partners who made contributions either in the form of cash or bank guarantees. On the ground that the source of income of the partners remained undisclosed the assessing officer treated the contributions made by the partners as income to the firm.

“Section 68 of the Act no doubt directs that if an assesse fails to explain the nature and source of credit entered in the books of account of any previous year, the same can be treated as income. In this case the amount that is sought to be treated as income of the firm is the contribution made by the partners to the capital. In a way the amount so contributed constitutes the very substratum for the business of the firm. It is difficult to treat the pooling of such capital as credit,” the bench said.

In both cases the appeals filed by taxing authorities was rejected and the citizen’s plea upheld. These are good signals in a system of complicated taxation methodologies.

By: L Ravichander