Income Tax Appellate Tribunal - Cochin
Paul John, Delicious Cashew Co. vs The Income-Tax Officer on 29 June, 2004
Equivalent citations: [2005]94ITD131(COCH), [2006]280ITR110(COCH), (2005)98TTJ(COCH)440
ORDER
K.P.T. Thangal, Judicial Member
1. This appeal by the assessee is for the assessment year 2000-01. This appeal is directed against the order of the Commissioner of Income-tax dated 8-3-2004, passed under Section 263 of the Income-tax Act, 1961.
2. The case of the assessee is that the proviso to Section 14A would act as a fetter on CIT's power for revision inasmuch as under this proviso, the assessing authority is prohibited from enhancing the assessment order in any circumstances. Impliedly, the learned Commissioner will not be expected to give direction to the assessing authority to enhance the assessment, if the assessing officer himself has no power to do it. It is also the case of the assessee that the direction given to the assessing authority to enhance the assessment exfacie inappropriate and against the provisions of the law and also against the spirit of the Circular No. 11 of 2001 issued by the Central Board of Direct Taxes.
3. In this case, the assessee filed the return on 30-10-2000 declaring the total income at Rs. 1,11,380/-, which was processed under Section 143(1) of the Act, on 27-12-2001. The assessee is a partner in M/s. Kandankulathy Copra Centre and the share income from the said firm is exempt under Section 10(2A) of the Act. However, the assessee deducted an amount of Rs.70,763/- being interest paid to various persons for earning such exempted income and claimed the set off of the loss arrived thereon against the income from other heads though such an adjustment is not allowed as per Section 14A of the Act.
3.1 The assessee received rental income of Rs. 1,80,000/- in respect of his property at Emakulam, let out to Central Administrative Tribunal. In addition to this, the assessee shown an amount of Rs. 60,000/- as service charges receivable under the head income from other sources in respect of various services like lift, electrician, gardener, watch and ward etc. provided to the tenants and deducted proportional service expenses incurred thereon. According to the Commissioner, since the above service charges receivable is part of property income, he should have clubbed the service charges to the property income received and should not have deducted the proportional expenses as assessee has already claimed an amount of Rs. 42,840/- under Section 24 of the Act, while computing the property income.
3.2 The Commissioner was of the view that while processing the return under Section 143(1), the assessing officer failed to look into the above aspects which are prejudicial to the interest of revenue, and hence a notice under Section 263 of the Act was issued and served on the assessee requiring the assessee to show cause why the assessment should not be set aside to enable the assessing officer to redo the assessment to bring to tax the incomes which have escaped assessment. The case was posted for hearing on 1-3-2004. though there was no representation on behalf of the assessee, the assesses filed written explanation. The learned Commissioner rejected the explanation offered by the assessee, observing as under:-
"Regarding the assessee's contentions on the claim of deduction of Rs. 70,763/- in respect of interest paid to various persons for earning the share of profit from M/s. Kandankulathy Copra Centre that the same is proper and also as the proviso to section to Section 14A of the Act prohibits recourse to action Under Section 147/154 of the Act to reassess such income prior to A.Y.2001-02 it is to be mentioned that the proviso to section bans only action Under Section 147/154 but excludes the provision of Section 263 of the Act, which means where there is genuine escapement of income the Commissioners of Income tax can invoke the provisions of Section 263 of the Act and bring to tax such escaped income.
In view of this, the contention of the assessee on this point is not acceptable and accordingly rejected Regarding the assessee's contention on the second point it is to be mentioned that since the service charges as received are connected to the property let out, it is necessary to examine the various aspects of the issue with reference to the facts of the case and legal discussion. This has not been done as it is beyond the scope of the intimation sent. The assessing officer has to examine the issue in detail.
In view of the above facts, since the assessment made under Section 143(1) of the Income tax Act, 1961 dated 27-12-2001 is erroneous in so far as it is prejudicial to the interest of revenue, the assessment made Under Section 143(1) of the Act is set aside with a direction to assessing officer to redo the assessment in accordance with law."
Aggrieved by the above finding of the Commissioner, the assessee is in appeal before the Tribunal.
4. Assailing the order of the Commissioner, , the assessee's representative submitted that Section 14A was introduced by Finance Act, 2001 with retrospective effect from 1-4-1962. Section 14A deals with certain expenditure incurred in relation to income not includible in the total income. Section introduced with retrospective effect makes it clear that while computing taxable income of an assessee, no deduction should be allowed in respect of any expenditure incurred by the assessee in relation to an income which does not form part of the total income under the income-tax Act, 1961. Immediately, thereafter the Board issued a Circular bearing No. 11 of 2001 dated July 23, 2001 which is available at ITR 250 (84) Statute. It restricts the power of reopening of completed assessment on account of the newly introduced provisions of section 14A which will have far reaching consequences and unsettled the cases which has become final. Para 4 of this Circular takes away the power of the Assessing Officer to reopen the assessment which has become final before the first day of April, 2001. In the light of the above facts, the assessee's representative submitted, if the assessing officer has no power, to reopen the assessment, which is settled and which has become final, the Commissioner also have no power because the order of the assessing officer is not prejudicial to the interest of revenue. Even if it is prejudicial to the interest of the revenue, that alone will not give the power to Commissioner to invoke the jurisdiction invested in him under Section 263 of the Act, unless the order passed by the assessing officer is also erroneous. In the instant case, the order passed is not erroneous because of the retrospective introduction of Section 14A brought in to the statute book with effect from 1-4-1962.
5. Coming to the error pointed out by the Commissioner in the order of the assessing officer, assessee's representative submitted, it is also not tenable. He brought my attention to the lease agreement entered into between the assessee and CAT, Ernakulam Bench. Clause 3 of the lease agreement is reproduced below:-
"The Government of India shall, subject to the term hereof, pay Rs. 15,000/- (Fifteen Thousand only) as rent and premises maintenance charges and of Rs. 5000/- (Five Thousand only) as service cum/maintenance charges for the said premises per month for services like maintenance of lifts, pump house, transformer installation, sewage system, water supply, main and emergency staircases, garden, general lighting, in the common facilities in and around the building, provision of free car park, provision of generated power for common amenities, salary paid to car park attendant, lift operator, watchman, sweeper, fall time electrician and plumper for attending to common amenities and facilities, painting and polishing the building and fixtures belonging to the lessor once in three years, free water supply etc. i.e. total of Rs. 20,000/-(Twenty thousand only) per month payable monthly. In the event the term hereby created being terminated as provided by these presents, the Government of India shall pay only a proportionate part of the rent for the fraction of the current month upto the date of such determination."
In the light of the above the assessee's representative submitted that the lease agreement bifurcate the rent and maintenance charges. It is not an integral part of the rent and it was treated rightly as income from other source. The assessee's representative relying upon the following judgments; i.e. reported in 259 ITR 389 (Mds); 82 ITR 547 (SC); 159 ITR 270 (Cal.) and 259 ITR 567 (Ker.) submitted that, if an assessee renders services in addition to getting the rental income from a tenant, receipts from the tenants for rendering services is a separate receipt and the expenditure can be claimed against the rendering such services. Hence, the assessee's representative submitted that even on this ground the Commissioner's order does not stand for legal scrutiny. The assessment completed by the assessing officer is not erroneous.
6. The learned departmental representative, on the other hand, supported the order of the Commissioner and reiterated the reasoning of the commissioner, which is reproduced hereinabove.
7. Hearing rival submissions, I am of the view that the appeal by the assessee is liable to be allowed. The assessee's representative filed a copy of paper book containing the computation of Income, Circular No. 11 referred to above, lease agreement entered into between the assessee and the CAT, Ernakulam Bench and also the judgments of the Hon'ble Supreme Court and High Courts in support of assessee's case. In the Computation, it is seen that an amount of Rs. 50,372/- was claimed by the assessee as exempt under Section 10(2A) of the Act, being interest paid to Irinjalakuda Co-operative Bank, Irinjalakuda, Rs. 38089/-; Lord Krishna Bank Irinjalakuda, Rs. 1363/- and Kandamkulathi Copra Centre Rs.10920/-. According to the Commissioner these are the amounts spent by the assessee to earn the exempted income under Section 10(2A) and therefore, the assessee cannot claim it as a deduction against the taxable income. This is because of the newly introduced Section 14A which came into statute book with effect from 1-4-1962. The Commissioner also formed an opinion that the assessee had no right to claim any expenditure against the rental income received. The service charges collected by the assessee are part and parcel of the rental income and the assessee cannot claim any expenditure against this.
8. The view taken by the Commissioner does not stand legal scrutiny. As rightly contended by the learned representative of the assessee, Section 14A was introduced by Finance Act, 2001 with retrospective effect from 1-4-1962. It will have far reaching consequences. The settled cases of almost half a century will unsettle by this retrospective operation. The Board realised the consequences, and issued Circular No. 11 of 2001 dated 23-7-2001. The Circular of the Board is binding on all the Income-tax Authorities.
9. Section 263 empowers the Commissioner to call for the records and examine of any person and on examining if he forms an opinion that the order passed by the assessing officer is erroneous in so far as it prejudicial to the interest of revenue, he may after giving the assessee an opportunity of being heard and after making or causing to be made such enquiry as he deems necessary, pass such orders thereon as the circumstances of the case justify, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. From the above it is very clear that first of all the order passed by the assessing officer should be erroneous and also it should be prejudicial to the interest of revenue. If the order is not erroneous, even if it is prejudicial to the interest of revenue, the Commissioner has no revisionary power. If the assessing officer has no jurisdiction to pass an order, it is not on order at all. It is null and void. In the instant case it is very clear that on the basis of the policy decision taken by the Board, the assessing officer's power is taken away to reopen the assessment under Section 147. If the assessing officer has no power, the Commissioner also has no power.
10. Again the order was passed by the Commissioner invoking the jurisdiction invested in him under Section 263 on 8-3-2004. At the time of passing the order the proviso was already in the state book. Section 14A reads as under:-
"14A. For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act:
Provided that nothing contained in this section shall empower the assessing officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1st day of April, 2001.
The proviso takes away the power of the assessing officer either to reassess under Section 147 or to pass an order enhancing or reducing the refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning, on or before 1st day of April, 2001. This is, as simple as, that. The assessing officer has no power to reopen or to change or to increase or decrease the liability of the assessee on the basis of Section 14A, in view of introduction of the proviso to Section 14A inserted by the Finance Act, 2002 w.e.f.11-5-2001. If the assessing officer has no power, the Commissioner has also no power. A valid assessment order is a must, for CIT's revisionary power is directed against a valid but erroneous and prejudicial order of the assessing officer. In the instant case since the assessing officer himself has no power to pass such an offer, the order passed under Section 263 stands in vacuum. Since no valid order of the assessing officer exist, the order passed under Section 263 is bad in law.
10. In the result, the appeal by the assessee is allowed.