Gujarat High Court
Commissioner vs Demuric on 21 September, 2010
Author: K.A.Puj
Bench: K.A.Puj
Gujarat High Court Case Information System
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TAXAP/881/2009 7/ 7 ORDER
IN
THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX
APPEAL No. 881 of 2009
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COMMISSIONER
OF INCOME TAX - Appellant(s)
Versus
DEMURIC
HOLDINGS PVT LTD - Opponent(s)
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Appearance :
MR
MR BHATT, SR. COUNSEL with MRS MAUNA M BHATT
for Appellant
None for
Opponent(s) : 1,
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CORAM
:
HONOURABLE
MR.JUSTICE K.A.PUJ
and
HONOURABLE
MS.JUSTICE H.N.DEVANI
Date
: 21/09/2010
ORAL
ORDER
(Per : HONOURABLE MR.JUSTICE K.A.PUJ) The Commissioner of Income Tax, Valsad has filed this tax appeal under section 260A of the Income Tax Act, 1961 (the Act) for assessment year 1998-99, proposing to formulate the following substantial questions of law for determination and consideration of this Court:
"[A] Whether, on the facts and in law, the Appellate Tribunal was justified in upholding the order of CIT(A), in quashing the assessment made u/s 143(3) r.w.s. 147 without considering the fact that the assessment was validity re-opened by the Assessing Officer after recording the reasons and as per the provisions of section 147 of the Act?
[B] Whether, on the facts and in law, the Appellate Tribunal was justified in holding that the re-assessment proceedings u/s 147 were initiated by invoking the provisions of section 14A of the Act?"
Heard Mr.M.R.Bhatt, learned Senior Advocate with Mrs.Mauna Bhatt, learned Standing Counsel for the revenue and perused the orders passed by the authorities below.
The brief facts giving rise to the present tax appeal are that the respondent assessee has filed its return of income for assessment year 1998-99 declaring a loss of Rs.30,12,430/-, which was processed under section 143(1)(a) of the Act on 4.12.1998. Notice under section 148 was issued on 16.10.2002, in response to which, the respondent assessee filed a revised return on 21.12.1999, declaring a loss of Rs.30,14,446/-. During the course of assessment proceedings, it was observed by the Assessing Officer that the assessee had received dividend income of Rs.26,63,532/- for the year under consideration and the same was claimed as exempt under section 10(33) of the Act. However, in the profit and loss account, the assessee claimed interest expenditure of Rs.29,18,962/- for earning the dividend income which was held not allowable, as the dividend income earned by the assessee was exempt from tax. Based on these facts and relying upon the decision of the Supreme Court in the case of CIT v. United General Trust Ltd., 200 ITR 488 (SC), the interest expenses amounting to Rs.29,18,962/- were disallowed by the Assessing Officer on the ground that there cannot be any expenses for earning the income exempt from tax i.e. dividend income of Rs.26,63,532/-.
Being aggrieved by the said order, the respondent assessee preferred an appeal before the CIT (Appeals), who cancelled the assessment by quashing proceedings under section 147 of the Act. The CIT (A) has held that the assessment where the proceedings have become final before 1.4.2001 should not be reopened under section 147 to disallow expenditure incurred to earn exempted income by applying the provisions of newly inserted section 14A of the Act.
Revenue carried the matter in appeal before the Tribunal and the Tribunal vide order dated 17.10.2008 confirmed the order passed by the CIT (A). The Tribunal has also taken the view that once the assessment proceedings have become final, it could not be reopened by applying the provisions of section 14A of the Act.
It is this order which is under challenge in the present tax appeal.
Mr.M.R.Bhatt, learned Senior Counsel for the appellant has submitted that both the appellate authorities have erroneously come to the conclusion that the assessment was reopened relying upon the provisions of section 14A of the Act. In fact, from the assessment order and reasons recorded by the Assessing Officer, the assessment was reopened in view of the decision of the Supreme Court in the case of CIT v. United General (supra), wherein the apex court has held that proportionate management expenses should be deducted from the gross dividend. Neither in the reasons recorded not in the body of assessment order, the reference to section 14A was made. He has further submitted that section 14A was introduced by the Finance Act, 2001. Nowhere in the body of the assessment order, reasons recorded or in any of the correspondences made with the assessee, reference to section 14A has been made. He has also submitted that while issuing Circular No.11 dated 23.7.2001 giving clarification to section 14A, the CBDT has mentioned that "this section was not introduced with prospective effect, as that would have implied that before the introduction of the said provision, expenditure incurred to earn exempt income was allowable." He has, therefore, submitted that such kind of expenditures were previously also disallowable and hence, even the respondent assessee has also not canvased this argument during the course of assessment proceedings. He has further submitted that section 147 has been substituted by the Direct Tax Law (Amendment) Act, 1987 w.e.f. 1.4.1989 and according to section 147, the Assessing Officer is empowered to assess or reassess such income and also may other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under section 147 of the Act. He has, therefore, submitted that the assessment was rightly reopened by the Assessing Officer and hence, the appeal deserves admission.
We have considered the submissions made by the learned Senior Counsel for the appellant and also considered the findings recorded by the CIT (A) as well as the Tribunal in light of the relevant statutory provisions and the case law.
The Assessing Officer, while framing the assessment, has simply observed that the deduction on account of incorporate dividend is to be allowed with reference to the net dividend income in view of judgement in the case of CIT v. United General Trust Ltd. (supra) to the effect that proportionate management expenses should be deducted from the gross dividend. This observation was made by the apex court in the said judgement keeping in view the provisions contained in section 80M of the Act. However, in the year under consideration, i.e. assessment year 1998-99, section 80M was not force. A specific contention was raised by the assessee before the CIT (A) that section 80M of the Act was omitted by the Finance Act, 1997 w.e.f. 1.4.1998 and the respondent assessee had neither proposed any dividend nor paid any dividend during the relevant previous year. It was, therefore, held that the re-assessment proceedings under section 147 of the Act was invalid in the eyes of law and the same deserves to be quashed.
While dealing with this contention of the assessee, the CIT (A) has observed in his order that the original return of income was filed on 26.11.1998 which was processed under section 143(1)(a) of the Act and the returned loss was accepted vide intimation dated 4.12.1998. Revised return of income was filed on 21.12.1999. The case was not selected for the scrutiny, therefore, the assessment was deemed to be completed before 31.03.2001 as per second proviso to section 143(1)(a) of the Act as no notice under section 143(2) was given within 12 months from the date of filing of the revised return. He has further observed that the provisions of section 14A restrict the Assessing Officer to initiate reopening proceedings in the cases completed before 1.4.2001. The same was further clarified by the CBDT Circular No.11 of 2001 dated 23.7.2001. The CIT (A) has, therefore, observed that the Assessing Officer, in total disregard to the provisions of the Act and the relevant Circular, initiated the proceedings under section 147 of the Act. The action of the Assessing Officer was thus against the law.
The Tribunal, while upholding the order of the CIT (A), has referred to the decision of the Hyderabad Bench in the case of V.Uppalaiah v. DCIT, (2005) 95 TTJ 706 and held that the facts being exactly identical and since the issue raised in the revenue's appeal is squarely covered by the said decision, the said appeal was dismissed.
For the foregoing discussion, we are of the view that, in absence of section 80M being in operation during the relevant period, the only presumption which can be drawn is that the action was sought to be taken by the Assessing Officer by applying the provisions contained in section 14A of the Act. The proviso to section 14A was inserted by the Finance Act, 2002 with retrospective effect from 11.5.2001 which specifically states 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.
In the above view of the matter, we see no justification in the orders passed by the appellate authorities below and hence, the reassessment proceedings were rightly cancelled by the Tribunal. We are, therefore, of the view that no question of law, much less a substantial question of law arises out of the impugned order of the Tribunal. The appeal is, accordingly, dismissed.
[K.A.PUJ, J.] [HARSHA DEVANI, J.] parmar* Top