Can Assessed Income be Less than Returned Income?

Section 143 of the Income Tax Act, 1961 (the Act) was substituted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f 1/4/1989. Prior to 1/4/1989, as per the provisions of sub-section (3) of section 143 of the Act the Assessing Officer after examination of the matter was required to make an assessment of total income or loss of the assessee by an order in writing and determine the sum payable by him or refundable to him on the basis of such assessment. However, after amendment from 1/4/1989, as per the provisions of sub-section (3) of section 143 of the Act, the Assessing Officer after hearing of the matter was required to make an assessment of total income or loss of the assessee by an order in writing and determine the sum payable by him on the basis of such assessment. As such the words “or refundable to the assessee” which were in the old sub-section (3) were conspicuously absent in the new sub-section. Further, the Central Board of Direct Taxes explained the amendments in its Circular No. 549 dated October 31, 1989. (1990) 182 ITR (st) 1 and the relevant part a 5.12 and 5.14 read as under –

“5.12   Since, under the provisions of sub-section (1) of the new section 143, an assessment is not to be made now, the provision of sub-section (2) and (3) have also been recast and are entirely different from the old provisions. A notice under sub-section (2) which will be issued only in cases picked up for scrutiny, is now issued only to ensure that the assessee has not understated his income or has not computed excessive loss or has not underpaid the tax in any manner while furnishing his return of income. This means that under new provisions in an assessment order passed under section 143(3) in a scrutiny case, neither the income can be assessed at a figure lower than the returned income nor loss can be assessed at figure higher than the returned loss, nor a further refund can be given except what was due on the basis of the returned income and which could have already been allowed under the provisions of section 143(1)(a)(ii)". 

“5.14   The provisions of sub-section (3) of the new section have also been simplified to provide for passing an assessment order under this sub-section only under one circumstance, that is, where a notice under sub-section (2) has been issued to the assessee, whose case is picked up for scrutiny. As already explained, since in an assessment completed under the new sub-section (3), neither the returned income can be assessed at a lower figure nor can further refund be granted as the words “or refundable to the assessee” which were in old sub-section (3) do not find place in the new sub-section.”

In view of the above, the departmental authorities have been reluctant to make an assessment of total income at a figure lower than the returned income.

In CIT vs Bakelite Hylam Ltd. (1999) 237 ITR 392 (AP) the assessee company filed its return of income for the assessment year 1989-90 on  29^th December, 1989 , admitting a net income of Rs.2,32,41,730/-.  An intimation u/s 143(1) (a) was issued on 11^th June, 1990 accepting the returned income and granting refund of Rs.1,08,00,894 /-. Subsequently, the case was taken up for scrutiny and the Assessing Officer passed on order dated 27th March, 1992 u/s 143(3) determining total income at Rs.1,76,62,580/- which resulted in a further refund of Rs.44,82,929/-. The Commissioner of Income Tax initiated revisional proceedings u/s 263 of the Act. By an order dated 17^th March, 1993, passed u/s 263, the Commissioner of Income Tax, directed the Assessing Officer to modify the assessment order in such a way that the income would not be less than the returned income and no refund shall arise thereby. In an appeal filed by the assessee against the order passed by the Commissioner of Income Tax before the ITAT, the Tribunal allowed the appeal filed by the assessee and set aside the order passed by the Commissioner. In reference filed by the department, the High Court held that the amendment cannot be read to mean that the legislature has withdrawn the power of the assessing authority to grant refund in appropriate cases. The provisions of sub-section (3) of section 143 cannot be read in isolation. On reading of clause (b) of sub-section (4) of section 143 of the Act, it is clear that on an assessment made u/s 143(1)(a) and such assessment results in refund, if such refund exceeds the amount refundable on regular assessment made u/s 143(3) of the Act, the whole or the excess amount so refunded shall be deemed to be tax payable by the assessee. The Court therefore held that assessing authority was entitled to determine the quantum of refund also in a regular assessment made u/s 143(3) of the Act.

In Gujarat Gas Co. Ltd. vs Jt. CIT (2000) 245 ITR 84 (Guj), the assesse filed its return of income for the A.Y. 1996-97 on November 30, 1996, showing taxable income of Rs. 5,13,86,320. An intimation was issued u/s 143(1)(a) was issued on October 7, 1997 after making some prima facie adjustment. Subsequently, in an assessment made u/s 143(3) of the Act vide order dated March 31, 1999, the Assessing Officer held that though the total income of the assessee was Rs. 2,11,81,620, the assessee was liable to tax on the total income of Rs. 5,13,86,320, on the ground that in accordance with Circular No. 549 dated October 31, 1989 the assessed income shall not be less than the returned income. The assessee filed on Writ Petition challenging the order of assessment dated March 31, 1999 passed by the Assessing Officer. The department took a preliminary objection that as there was alternative remedy provided by way of appeal under the Act, writ was not maintainable. To this, the court held that it is clear that ordinarily when an alternative remedy is provided the High Court should not exercise jurisdiction but it does not mean that when the order passed by the authority as bad or illegal the court cannot exercise the jurisdiction. The remedy must not be only alternative but it must be efficacious also. In the instant case, the Assessing Officer had not passed the order independently but in fact the jurisdiction was exercised by the Central Board of Direct Taxes by issuing a circular and therefore the order was without jurisdiction. The Court set aside the assessment order and directed the Assessing Officer to make the assessment order without keeping in mind the circular which he had referred to in the assessment order.

In conclusion, it may be pointed out that on realizing the anomaly the legislature has amended sub-section (3) to section 143 by Finance (No.2) Act, 1998 w.e.f. 1.10.1998 by inserting the words "or refund of any amount due to him" after the words "determine the sum payable by him". Though the amendment is made from 1-10-1998, in view of above legal position, it can be said that the amendment is clarificatory in nature and therefore retrospective in operation.