Delhi H.C : No Sec. 263 action if A.O followed the Tribunal & High Court decision on allowance of deduction under section 32AB

High Court Of Delhi

CIT Vs. Kelvinator Of India Ltd.

Assessment Year : 1989-90

Section : 32AB,263

Sanjay Kishan Kaul And Rajiv Shakdher, JJ.

IT Appeal No. 39 Of 1999

January  19, 2011


Sanjay Kishan Kaul, J. – The respondent filed returns for the assessment year 1989-90 which were assessed by the Assessing Officer vide order dated 26-3-1992. The assessment order records that “other income” have been shown by the assessee in Schedule K to the balance-sheet of the respondent-company. The question, inter alia, which was examined was arising from the deposit made by the respondent under section 32AB of the Income-tax Act, 1961 (hereinafter, referred to as ‘the Act’) as applicable in the relevant assessment year.

2. The Assessing Officer computed the profit under the head “Profits and gains of business” at Rs. 10,79,18,247 and allowed a deduction at Rs. 2,15,83,649 being 20 per cent of the amount under section 32AB of the said Act and thus, determined the taxable income at Rs. 7,51,53,465.

3. This order of the Assessing Officer dated March 26, 1992 was challenged before the Commissioner of Income-tax (Appeals) [hereinafter, referred to as “CIT(A)”] by the assessee raising the issue regarding short deduction under section 32AB of the said Act. In the appeal, the respondent/assessee was granted relief and in terms thereof, the deduction was recomputed against profits and gains of business as arrived at under Schedule VI to the Companies Act, 1956 (in short, ‘Companies Act’) for the purpose of section 32AB of the said Act. This resulted in the deduction being enhanced to Rs. 3,95,85,158. As a necessary corollary, the taxable income was reduced.

4. The Commissioner of Income-tax while making a scrutiny of the assessment record, found that the enhancement in the said deduction had been accorded in favour of the respondent/assessee by inclusion in the profits and gains from business of “other income” amounting to Rs. 4,14,06,000 (as mentioned in Schedule K of its balance-sheet). In the opinion of the Commissioner of Income-tax, the approach adopted was both erroneous and prejudicial to the interest of the Revenue. Consequently, a show-cause notice was issued to the respondent/assessee dated 21-2-1994 under section 263 of the Act in respect of the same.

5. The respondent/assessee filed a response to the show-cause notice. After hearing the respondent/assessee, the Commissioner of Income-tax passed an order on 25-3-1994, in terms whereof, the benefit of deduction under section 32AB of the said Act was allowed at 20 per cent on profit of business of the respondent after excluding “other income”.

6. The assessee aggrieved by this order, preferred an appeal before the Tribunal and succeeded in terms of the order dated 5-1-1999. The Department thereafter, carried the matter further in the present appeal and the question of law was framed by the order dated 7-9-2000. For the sake of convenience, the question of law so framed is extracted hereinbelow :

“Whether on the facts and in circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the Commissioner of Income-tax had no jurisdiction to exercise power under section 263 of the Income-tax Act ?”

7. At the inception itself, the question which arises is whether in the facts of the case, section 263 of the said Act could have been invoked. It is common case of both parties that the scope of application of section 263 of the said Act is governed by the principles set out in Malabar Industrial Co. Ltd. v. CIT[2000] 243 ITR 83 / 109 Taxman 66 (SC) as reaffirmed in CIT v. Max India Ltd.[2007] 295 ITR 282 /[2008] 166 Taxman 188 (SC). It has been held that the phrase “prejudicial to the interests of the revenue” used in section 263 of the said Act has to be read in the conjunction with an “erroneous” order passed by the Assessing Officer. Thus, it is not, as if in every case where there is loss of revenue, as a consequence of an order passed by the Assessing Officer, it can be treated as prejudicial to the interests of the revenue. Consequently, if the Assessing Officer has adopted one of the courses permissible in law, which resulted in loss of revenue or where two views are possible and the Assessing Officer has taken one view with which the Commissioner of Income-tax does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Assessing Officer is unsustainable in law.

8. If the aforesaid parameters are applied in respect of the factual matrix of the present case, it is found that the view which was prevalent at the appropriate point in time was that of the Tribunal at Delhi taken in the case of Asstt. CIT v. Northern India Theatres (P.) Ltd. [IT Appeal No. 6635 (Delhi) of 1991, dated 25-5-1993] and in Indian Transformers Ltd. v. Dy. CIT [IT Appeal No. 858 (Coch.) of 1991, dated 6-3-1995]. In terms of these judgments, the income of the assessee, shown in its balance-sheet under the head “Other income” had not to be excluded for the purposes of determining the permissible deduction under section 32AB of the Act. The notice was issued by the Commissioner of Income-tax under section 263 of the said Act on 21-2-1994, when, the aforesaid legal position was admittedly enuring for the benefit of the assessee. Therefore, on the date the Commissioner of Income-tax issued the show-cause notice, the legal position which obtained supported the view taken by the Commissioner of Income-tax (Appeals) in its order dated 7-8-1992. In these circumstances, the issuance of show-cause notice to the respondent/assessee was uncalled for.

9. The question of law is thus answered in favour of the respondent/assessee and the appeal is accordingly dismissed.

[Citation : 332 ITR 231]

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