Income Tax Appellate Tribunal - Mumbai
Lic Housing Finance Ltd , Mumbai vs Assessee on 18 February, 1998
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, MUMBAI.
BEFORE SHRI R.V.EASWAR, SR. VICE PRESIDENT AND SHRI R.K. PANDA, AM
I.T.A. Nos.672 & 673/Mum/2009
(Assessment Year :2003-04 & 2004-05 )
LIC Housing Finance Ltd., Vs. The Deputy Commissioner of
Bombay Life Building, Income Tax -2(2),
2nd floor, 45/47, Aayakar Bhavan, R.No.545,
Veer Nariman Road, M.K.Road,
Mumbai-400 001. Mumbai-400 020.
PAN:AAACL1799C
(Appellant) (Respondent)
Appellant by : Mr. Sunil Bhandari
Respondent by : Mr. Daya Shankar, DR
ORDER
Per R.V.Easwar, Senior Vice President:
These two appeals filed by the assessee pertain to the assessment years 2003-04 & 2004-05 and they are directed against the orders passed by the CIT under section 263 of the Income Tax Act, 1961 on 26th March, 2008.
2. The appeals arise in the following circumstances. The assessee is a company engaged in providing housing finance . In the returns filed for the years under appeal, it excluded Rs.10 crores and Rs.25 crores respectively from the profits and gains of business in the computation of the total income for income tax purposes. These amounts were excluded with the narration "transfer from special reserve" and "withdrawal from special reserve - not taxable" respectively in the computation sheets relating to the assessment years 2003-04 and 2004-05. In note No.19 of the notes to the accounts at Schedule 14 of the annual report for the year ended 31.3.2003, it was noted as follows:-
"Special reserve has been created over the years in terms of section 36(1)(iii) of the Income Tax Act, 1961 2 ITA Nos.672 & 273/Mum/09 out of the profits of the company. Special reserve No. I relates to the amounts transferred upto financial year 1996-97. Whereas special reserve No. II relates to the amounts transferred thereafter. In the current financial year Rs.10,00,00,000/- (previous year Rs.20,00,00,000/-) has been transferred from special reserve No. I to the profit and loss account".
3. While completing the assessments under section 143(3) of the Act, the Assessing Officer accepted the aforesaid exclusion of the amounts from the profits and gains of the business. However, there is no specific discussion or reference to the assessee's claim as above. The Assessing Officer made certain other disallowances in the assessment with which we are not concerned and in respect of those disallowances there is somewhat a lengthy discussion in the assessment orders.
4. Subsequently, the CIT took proceedings under section 263 on the ground that the assessments made as above accepting the assessee's claim regarding the exclusion of the amounts transferred from the special reserve No. I to the profit and loss account were erroneous and prejudicial to the interest of the Revenue and accordingly issued notices to the assessee as to why the assessments cannot be revised and the Assessing Officer be directed to include the amounts in the income of the assessee. The assessee would appear to have raised objections to the notice. The objections are set out in the order of the CIT and the gist thereof is that the reserves created by the assessee prior to 1.4.1997 were governed by section 36(1)(viii) as it stood then which was differently worded and therefore the amended section does not apply. The assessee also relied on the judgement of the Kerala High Court in the case of Kerala Finance Corporation Vs. CIT., 261 ITR 708 to contend that the amendment made to the above section by the Finance Act, 1997 took effect prospectively from 1.4.1998 and did not have any 3 ITA Nos.672 & 273/Mum/09 retrospective effect. Similar arguments were advanced also with regard to the provisions of section 41(4A) which was also introduced by the Finance Act, 1997 simultaneously with the amendment to section 36(1)(viii). The CIT however, found no merit in the objections of the assessee. According to him, the amendment made to section 36(1)(viii) and the introduction of section 41(4A) were to do away with a mischief or lacuna in the provisions and therefore, any amounts withdrawn from the special reserve, irrespective of whether it was merely "created" or was "created and maintained", were taxable as profits of the business in the year in which they were withdrawn. In this view of the matter, he held that the amounts withdrawn from the special reserves during the relevant previous years, even though they were created prior to 1.4.1997, were taxable in the assessment years under consideration. He accordingly directed the Assessing Officer to recompute the total income including the sum of Rs.10,00,00,000/- and Rs.25,00,00,000/- respectively for the assessment years 2003-04 and 2004-05.
5. It is against the aforesaid orders of the CIT that the assessee has filed the present appeals. The appeals are delayed. The CIT passed the orders for both the years on 26.3.2008 and it is not known as to when they were served on the assessee. Therefore, the office has computed the delay from the date of the orders of the CIT and has marked that the appeals are delayed by 253 days. The General Manager (Taxation) and Company Secretary of the assessee has filed an affidavit explaining the delay in which he has stated that due to heavy burden of work in a dual capacity namely as General Manager(Taxation) as well as Company Secretary, the receipt of the orders of the CIT was not attended to in time and it was only when the Assessing Officer had purported to give effect to the aforesaid orders that he realized that the orders of the CIT under section 263 would 4 ITA Nos.672 & 273/Mum/09 have been served on the assessee and it was only thereafter that he contacted the tax consultant who advised the assessee to file appeals to the Tribunal immediately. It is pleaded that in these circumstances, the delay should be condoned. On behalf of the Department it is pointed out that no sufficient cause has been shown to exist and it was only a general plea that due to heavy work load the assessee could not file the appeals in time which should not be accepted.
6. On a careful consideration of the affidavit and the explanation of the assessee, we are of the view that the delay should be condoned. The person who was in-charge of the taxation matters of the assessee also acted as its Company Secretary and naturally his workload was heavy. He was also required to convene and attend the Board meetings in his capacity as Company Secretary. It seems reasonable that due to his work load and pressure he overlooked the receipt of the orders of the CIT under section 263 and failed to take any proceedings against them. When he was made aware of the existence of these orders, when he participated in the proceedings before the Assessing Officer to give effect to the orders of the CIT, he immediately contacted the tax consultants of the assessee and proceeded to file the appeals. We are satisfied that in these circumstances the delay was due to sufficient cause and was not willful or deliberate. In Ramnath Sao @ Ramnath Sahu Vs. Gobardhan Sao, AIR 2002 (SC) 1201, the Supreme Court has held that pragmatic view should be taken in such cases and condonation of delay should be the normal rule and refusal the exception . There are similar observations by the Supreme Court in the case of N.Balakrishnan Vs. M. Krishnamurthy 1998 (7) SCC 123. Respectfully following these judgements, we condone the delay and admit both the appeals.
5 ITA Nos.672 & 273/Mum/097. Section 36(1)(viii) provides for deduction of an amount not exceeding 40% of the profits derived from the business of providing long term finance, if the assessee creates a special reserve. Before 1.4.1998, the section provided that in respect of any special reserve "created" by a financial corporation engaged in providing long term finance for certain specific purposes, such deduction would be given. By the Finance Act, 1997, which took effect from 1.4.1998 the language of the provision was amended to state that the deduction would be available in respect of "any special reserve created and maintained" by the financial corporation . Simultaneously, sub-section (4A) was inserted in section 41 which provided that where a deduction has been allowed in respect of any special reserve "created and maintained under clause viii of sub-section (1) of section 36", any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business and accordingly charged to income tax as the income of the year in which such amount is withdrawn. The contention put forward before us on behalf of the assessee was that there are two categories of reserves to be created by an assessee engaged in providing long term finance - (a) special reserve created and (b) special reserve created and maintained, and that section 41(4A) would apply only in respect of the latter category of reserves, i.e. to say, special reserves created and maintained by the assessee and would not apply to any special reserve created without any obligation to maintain the same. It is contended that in any case it is a question of interpretation of the statutory provisions and the effect of the amendments made by the Finance Act, 1997 on the special reserves created prior to 1-4-1998 and since more than one view is possible on the effect of the amendments, the adoption of one of the plausible views by the AO while completing the assessments does not confer jurisdiction on the CIT u/s.263 to hold that the assessments so made are 6 ITA Nos.672 & 273/Mum/09 erroneous and prejudicial to the interests of the revenue. These contentions are opposed on behalf of the department and it is contended that the amendments were made to suppress the mischief which was prevalent whereby assessees were writing back the reserves to their profit and loss account after having availed of the deduction and were not paying tax when the reserves were written back. It is contended that the amendment to section 36(1)(viii) makes no distinction between a special reserve created before 1.4.1998 and that created and maintained as such after the said date and if after 1.4.1998 any special reserve, whether created before or after the said date, is written back to the profit and loss account the same would be taxed as income of that year under section 41(4A). It is also contended by the Department that the amendment leaves no doubt in the matter and no two interpretations are possible and therefore, it cannot be said that the CIT did not have jurisdiction to take action under section 263.
8. On a careful consideration of the matter, we are of the view that the assessee must succeed on the question of jurisdiction of the CIT to take action under section 263 on the ground that the assessments were erroneous and prejudicial to the interest of the Revenue. In Malabar Industrial Co. Ltd. Vs. CIT., 243 ITR 83, the Supreme Court held that when the Assessing Officer has taken one view on a question on which two or more views are possible and the CIT does not agree with the view taken by the Assessing Officer and wants to substitute his view, the assessment order cannot be treated as erroneous or prejudicial to the interest of the Revenue unless the view taken by the Assessing Officer is unsustainable in law. If we apply this case to the case before us, it will be seen that on the question of the interpretation of section 36(1)(viii) of the Act as amended by the Finance Act, 1997 with effect from 1.4.1998, 7 ITA Nos.672 & 273/Mum/09 there is certainly scope for more than one view and the view taken by the AO cannot be said to be unsustainable in law. The assessee's view is that the special reserves created prior to the aforesaid date cannot be assessed under section 41(4A) when they are written back to the profit and loss account because when they were created there was no statutory condition that they should also be maintained as a reserve. Thus, there was no obligation on the assessee to maintain those reserves. If that is so, the amendment does not affect those reserves and when they are written back to the profit and loss account after 1.4.1998 they cannot be assessed to tax. The view of the assessee further is that the condition that the reserve should be maintained as such attaches only to the special reserves created on or after 1.4.1998 and if that condition is subsequently violated by writing it back to the profit and loss account, only then section 41(4A) would apply. In other words, the contention of the assessee is that when there is no condition for maintaining the special reserve as such, there is no question of any violation of the condition. On the other hand, the contention of the Revenue is that irrespective of the time in which the special reserve was created and irrespective of the fact that when it was created there was no condition that it should also be maintained as such, the amendment applies whenever the special reserve is written back to the profit and loss account since the object of the amendment is to put an end to the mischief adopted by some assessees who wrote back the special reserve to the profit and loss account without offering the same as income even though when the special reserve was created they had obtained a deduction. The assessee's contention seems to be supported by Circular No.763 dated 18.02.1998 issued by CBDT explaining the amendments made by the Finance Act, 1997. In para 21.1 of the circular it has been stated that clause 36(1)(viii) as it stood before the 8 ITA Nos.672 & 273/Mum/09 amendment "imposes a condition of creation of a special reserve, it does not impose any condition on the maintenance of the reserve". In para 21.2, the object of the amendment has been brought out by saying that the words "special reserve created" in the section was amended by substituting in their place the words " special reserve created and maintained" in order to "incorporate the condition regarding maintenance of the reserve". The circular also says that the amendment will apply from the assessment year 1998-99 and subsequent years. Another question that is thrown up by the amendment is whether the view taken by the CIT would amount to giving retrospective effect to a taxing provision namely section 41(4A). In addition to the circular the judgement of the Kerala High Court cited supra also supports the assessee's point of view. IN this judgement, it was held that the condition prescribed by section 36(1)(viii) as it stood before being amended was only that a special reserve should be created and that there was no condition that it should be continued to be maintained . The requirement that it should be maintained as such was brought in only by the amendment to the section and by insertion of sub-section (4A) of section 41 which do not have any retrospective effect. The order of the Authority for Advance Ruling in the case of Rural Electrification Corporation Ltd. (312 ITR 122) also supports the assessee's interpretation. In this order it was held that but for the amendment to section 36(1)(viii), the restriction against withdrawal of the special reserve cannot be read into the section. It was further held that it is not permissible to read words into a provision which is otherwise clear, merely because the object of the amendment will be served better. It was observed that the additional words introduced into section 36(1)(viii) by the amendment imposed an additional obligation which is not merely declaratory of the existing provision. While making these observations, the 9 ITA Nos.672 & 273/Mum/09 Authority referred to the circular and the judgement of the Kerala High Court cited above as also an order of the Chandigarh Bench of the Tribunal in the case of Delhi Financial Corporation Vs. JCIT, (2007) 13 SOT 170. In addition to these cases, we may also refer to the general principle that in the absence of clear words indicating that the amendment is clarificatory, it should not be given retrospective effect, particularly when the pre-amended provision is clear and unambiguous. It is also to be noted that where a new provision impairs an existing right - in this case, the right of the assessee to utilize the reserve freely for other purposes - or creates a new obligation - in this case, an obligation to maintain the reserve as such - retrospectivity cannot be readily inferred. It was also held in Govind Das Vs. ITO (1976) 103 ITR 123 that if the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed prospectively only.
9. In view of the foregoing discussion, it seems to us that in the present case, the action of the CIT is based on his interpretation of the amended provisions of section 36(1)(viii) and section 41(4A), introduced by the Finance Act, 1997 with effect from 1.4.1998, whereas the Assessing Officer has accepted the interpretation canvassed by the assessee. The case thus falls squarely within the ratio of Malabar Industrial Company Ltd. (supra), where it was held that the CIT cannot hold the assessment to be erroneous and prejudicial to the interest of the Revenue merely on the ground that his interpretation of the statutory provisions should be preferred to the interpretation which appealed to the Assessing Officer. In this view of the matter, we hold that the CIT had no jurisdiction to take proceedings under section 263.
10 ITA Nos.672 & 273/Mum/0910. In the view we have taken, it is not necessary to examine and decide the merits of the rival interpretations. The orders of the CIT are accordingly set aside and the appeals of the assessee are allowed with no order as to costs.
Order pronounced on this 2nd day of December, 2009.
Sd/- Sd/-
(R.K. PANDA) ( R.V.EASWAR )
Accountant Member Senior Vice President
Mumbai, Dated 2nd December, 2009.
somu
Copy to :
1. The Appellant
2. The Respondent
3. The CIT-, Mumbai.
4. The CIT-2, Mumbai
5. The DR 'A ' Bench
/True Copy/ By Order
Asstt. Registrar, I.T.A.T, Mumbai