Madras H.C : The brief facts of the case of the petitioner herein as seen from the affidavits are as hereunder. The assessment years concerned in these writ petitions are 1976-77, 1977-78, 1980-81, 1981-82 and 1982-83.

High Court Of Madras

Emcete And Sons Pvt. Ltd. vs. Commissioner Of Income Tax & Anr.

Sections 40A(8), 58(2), 264

Asst. Year 1976-77, 1977-78, 1980-81, 1981-82, 1982-83

Y. Venkatachalam, J.

Writ Petns. Nos. 8526 to 8530 of 1989

3rd July, 1998

Counsel Appeared

P.P.S. Janarthana Raja, for the Petitioners : S.V. Subramaniam, for C.V. Rajan, for the Respondent

JUDGMENT

Y. VENKATACHALAM, J. :

Since in all these writs, the point involved and also the parties are common, all these writ petitions are disposed of by this common order with the consent of the parties concerned.

2. Invoking Art. 226 of the Constitution of India, the petitioner herein has filed the present writ petitions and seeks for a writ of certiorarified mandamus to quash the orders of the first respondent in C. No. 217-1/33 of 1986-87, etc., dt. 7th Sept., 1988, and 13th Sept., 1988, respectively, as illegal and without jurisdiction and also to direct the respondents to delete the disallowance of interest under s. 40A(8)/58(2) of the IT Act, 1961. In support of the writ petitioners, the petitioner herein has filed separate affidavits wherein he has narrated all the facts and circumstances that forced him to file the present writ petitions and requested this Court to allow the writ petitions as prayed for. On behalf of the respondents though no counter affidavit was filed, they argued the matter.

3. Heard the arguments advanced by learned counsel appearing for the petitioner and also those of learned senior counsel appearing for the Department. I have perused the contents of the affidavits together with all the relevant material documents available on record in the form of typed set of papers. I have also taken into consideration the various points raised by learned counsel appearing for the parties during the course of their arguments.

4. The brief facts of the case of the petitioner herein as seen from the affidavits are as hereunder. The assessment years concerned in these writ petitions are 1976-77, 1977-78, 1980-81, 1981-82 and 1982-83. In all these assessments, there was disallowance of interest under s. 40A(8)/58(2) of the IT Act. Such disallowance of interest is as follows for the respective assessment years The petitioner objected to such disallowances on the ground that the entire interest cannot be treated for disallowance under s. 40A(8)/58(2); but only that amount attributable to the business. It was also contended by the petitioner that the disallowance under s. 40A(8)/58(2) should have been made only with reference to the amount of interest on deposits and not in respect of other interest paid. It is the case of the petitioner herein that the total interest amount should be apportioned between “business” and “other income” and s. 40A(8) has to be applied to the “interest on deposits” charged against business income. But the ITO did not accept the contention of the petitioner and has made such disallowance. Aggrieved by the order of the ITO, the petitioner filed appeals to the CIT(A) IV, Madras, who by his common order dt. 29th July,1985, accepted the contention of the petitioner and directed the ITO to modify his orders. The relevant extract of the order of the CIT(A) IV, is extracted as under : “13. (iii) Disallowance under s. 40A(8)—Rs. 32,553. The assessee-company made certain interest payments and the ITO disallowed 15 per cent of such interest payments under s. 40A(8). He made a disallowance of Rs. 32,553. The appellant says that the disallowance under s. 40A(8) can be made only in respect of interest payments coming under the head ‘Business’. The appellant says that interest payments considered under any other source should not be disallowed. 14. Under s. 40A(8) interest payments made by an assessee under the head ‘Business’ should be subjected to a 15 per cent disallowance. Similarly under s. 58(2) a 15 per cent disallowance should also be made in respect of interest payments considered under the head ‘Income from other sources’. In respect of other interest payments, for example—under the head ‘interest on securities’ and ‘House property’—no disallowance is called for. The ITO is directed to modify the disallowance accordingly.”

5. The question whether s. 40A(8)/58(2) was applicable to the petitioner was neither raised nor argued or considered by the CIT(A) and was not an issue before him. Subsequently, the petitioner made applications to the ITO, Companies Circle I(4), Madras 600 034, requesting the officer to rectify his assessment under s. 154 of the IT Act on the ground that the petitioner is a miscellaneous financial company referred to in sub-cl. (vi) of cl. (c) of the Explanation to s. 40A (8)/58(2) and that, therefore, the said section was not applicable to the petitioner- company. The ITO by his common order for the asst. yrs. 1976-77, 1977-78, 1980-81 to 1984-85 dt. 11th July, 1986, declined to pass an order rectifying the assessment and he dismissed the petitions under s. 154 of the IT Act. Aggrieved by the order of the ITO, the petitioner filed a petition under s. 264 of the IT Act with the first respondent. However, the first respondent without going into the merits of the case held that since the petitioner had filed an appeal against the disallowance of interest under s. 40A(8)/58(2), the ITO could not have rectified the assessment under s. 154 of the Act in view of sub-s. (1A) of s. 154 and in this view of the matter, dismissed the petitions on a technical ground. However, the first respondent by his order C. No. 217-1/28 of 1987, dt. 21st Sept., 1988 for the asst. yr. 1983-84 and C. No. 217-1(27 of 1986-87), dt. 21st Sept., 1988, for the asst. yr. 1984-85 allowed the petitioner’s submissions on the ground that s. 40A(8)/58(2) was not applicable and directed the ITO to delete the disallowance of interest for these assessment years. Therefore, the first respondent is not correct in dismissing the petition under s. 264 on the ground that s. 154(1A) is applicable to the petitioner’s case. He should have considered the arguments of the petitioner made before him at the hearing of the case. He should have found that s. 154(1A) was not applicable since the ground taken in s. 154 proceedings was neither the subject-matter of appeal nor the subject-matter of the decision before the CIT(A) and, therefore, s. 154(1A) was not a bar to him to pass orders under s. 264 of the IT Act. While the ITO dismissed the petitions under s. 154 for rectification on the merits, the first respondent dismissed the petition on the grounds of maintainability in view of s. 154(1A). Having held on the merits that the petitioner is a miscellaneous financial company for some assessment years, there was no justification for rejecting the petition of the petitioner on the ground of maintainability without considering the merits of the case for other assessment years. The provisions of s. 154(1A) are not applicable to the petitioner’s case. The first respondent having accepted the contention of the petitioner on the merits that s. 40A(8)/58(2) is not applicable to the petitioner for certain assessment years is not correct in dismissing the present petitions under s. 264 on technical grounds. Hence, these writ petitions.

6. In this case, the disputed point is that whether the disallowance made in the concerned assessments under s. 40A(8) of the IT Act, 1961, by the ITO is correct or not. Such disallowance is vehemently objected to by the petitioner on the ground that the entire interest cannot be treated for disallowance under s. 40A(8)/58(2), but that amount attributable to the business. According to the petitioner, s. 40A(8) has to be applied to the “interest on deposits” charged against business income. The ITO did not accept the said contention of the petitioner. But on appeal before the CIT (A) IV, by his common order he accepted the contention of the petitioner and directed the ITO to modify his order. In the said order it has been specifically held by the CIT(A) IV, as follows : “Under s. 40A(8) interest payments made by an assessee under the head ‘Business’ such be subjected to a 15 per cent disallowance. Similarly, under s. 58(2) a 15 per cent disallowance should also be made in respect of interest payments considered under the head ‘Income from other sources’. In respect of other interest payments, for example—under the heads ‘Interest on securities’ and ‘house property’, no disallowance is called for.” That being so when the petitioner herein made applications to the ITO, requesting the officer to rectify his assessment under s. 154 of the Act on the ground that the petitioner-company is a miscellaneous financial company referred to in sub-cl. (vi) of cl. (c) of the Explanation to s. 40A (8)/58(2) and that therefore, the said section was not applicable to the petitioner company, but, the ITO by his common order for the assessment years in question, i.e., 1976-77, 1977-78, 198081 to 1984-85 dt. 11th July, 1986, declined to pass an order rectifying the assessment on the ground that the petitioner was not a financial company within the meaning of sub-cl. (vi) of cl. (c) of the Explanation to s. 40A(8)/58(2) and according to the ITO because the petitioner’s major head of income is income from property, it cannot be said to carry on exclusively or almost exclusively two or more classes of business referred to in the sub- clause preceding sub-cl. (vi). In this view of the matter, he dismissed the petitions under s. 154 of the IT Act. Aggrieved by the order of the ITO, the petitioner filed petitions under s. 264 of the Act with the first respondent. Before him it was contended that the CIT(A) by his order dt. 7th March, 1988, in ITA No. 156 of 1986-87 for the asst. yr. 1985-86 and also by his order dt. 21st April, 1988, in ITA No. 20 of 1987-88 for the asst. yr. 1979-80 held that the petitioner should be regarded as a miscellaneous financial company as defined under sub-cl. (vi) of cl. (c) of the Explanation to s. 40A(8)/58(2) and in view of this no disallowance of interest could be made under s. 40A(8)/58(2). It is also significant to note that the IT Department had accepted the decision of the CIT(A). But, the first respondent without going into the merits of the case held that since the petitioner had filed an appeal against the disallowance of interest under s. 40A(8)/58(2), the ITO could not have rectified the assessment under s. 154 of the Act in view of sub-s. (1A) of s. 154 of the Act and in this view of the matter, dismissed thepetitioners on a technical ground. Here, it is significant to note that s. 264 only provides that no appeal should have been filed against the order which was subject-matter of dispute under the provisions of s. 264 and in this case it is an admitted fact that no appeals have been filed against the order of the officer refusing to rectify the assessment under s. 154 of the Act in respect of the question whether the provisions of s. 40A(8)/58(2) are applicable to the petitioner’s case at all. That factum was not at all taken into consideration by the first respondent while dismissing the revision petition under s. 264. That apart, yet another significant circumstance in this case is that the first respondent himself by his order C. No. 217-1/28 of 1987, dt. 21st Sept., 1988, for the asst. yr. 1983-84 and C. No. 217-1(27) of 1986-87, dt. 21st Sept., 1988, for the asst. yr. 1984-85 allowed the petitioner’s submissions on the ground that s. 40A(8)/58(2) was not applicable and directed the ITO to delete the disallowance of interest for these assessment years. Therefore, there is every force in the argument of learned counsel for the petitioner that the first respondent should have followed his own order for the asst. yrs. 1983-84 and 1984-85 wherein he allowed the petitioner’s contention that s. 40A(8)/58(2) is not applicable to the petitioner’s case. In the above circumstances, it has been rightly contended by the petitioner that the order of the first respondent for the asst. yrs. 1976-77, 1977- 78, 1980-81, 1981-82 and 1982-83 is against the provisions of law and contrary to the facts and circumstances of the case. He is also not correct in not deciding the merits of the case. So also, the first respondent having taken note of the fact that the Department has accepted the position that s. 40A(8)/58(2) is not applicable to the petitioner, he is not correct in dismissing the petitions under s. 264 on a technical ground. Further, the first respondent has failed to note that the subject-matter of rectification proceedings before the ITO as well as the first respondent under s. 264 of the Act was not the subject-matter of the dispute before the CIT(A) and, therefore, the provisions of s. 154(1A) were not a bar to him to pass orders under s. 264 of the IT Act. Another significant aspect in this case is that when the first respondent has dismissed the petitioners on the ground of maintainability in view of s. 154(1A), the very same first respondent, for the asst. yrs. 1983-84 and 1984-85 allowed similar petitions in favour of the petitioner. Having held on the merits that the petitioner is a miscellaneous financial company for some assessment years, there was no justification for rejecting the petitions of the petitioner on the grounds of maintainability without considering the merits of the case for other assessment years. Further the ITO dismissed the petitions under s. 154 for rectification on the merits stating that s. 40A(8)/58(2) was applicable to thepetitioner and that was the subject-matter of appeal to the CIT(A). It has already been held by this Court that the question whether s. 40A(8)/58(2) was applicable to the petitioner or not, was not the subject-matter of appeal to the CIT(A) whereas the only point raised in the appeal is regarding the quantum of disallowance based on s. 40A(8)/58(2). In such circumstances, the provisions of s. 154(1A) are not applicable to the petitioner’s case. Therefore, the ITO is not correct in dismissing the petitions under s. 154 for rectification on the merits. Further, the order rejecting the revision petitions on a technical ground is illegal and without jurisdiction for the only reason that the first respondent had accepted the contention of the petitioner on the merits, that s. 40A(8)/58(2) is not applicable to the petitioner for certain assessment years. Therefore, the first respondent is not correct in dismissing the petition under s. 264 on technical grounds. Further, it is a clear case where the first respondent himself has accepted the contention of the petitioner on the merits that s. 40A(8)/58(2) is not applicable to the petitioner for certain asst. yrs. 1983-84 and 1984-85. That being so, there is no explanation from the Department as to why that benefit is denied to the petitioner for the assessment years in question. That apart, in this case the CIT(A) has also categorically held that under s. 40A(8) interest payments made by an assessee under the head “Business” should be subjected to a 15 per cent disallowance and under s. 58(2) a 15 per cent disallowance should also be made in respect of interest payments considered under the head “Income from other sources”. He has also held that in respect of other interest payments, for example—under the heads “Interest on securities” and “House property”, no disallowance is called for and also has directed the ITO to modify the disallowance accordingly. It is significant to note that the IT Department had accepted the decision of the CIT(A). In spite of all these aspects, the ITO has declined to pass an order rectifying the assessment simply on the ground that the petitioner-company is not a miscellaneous financial company as per the relevant section. Whereas it is significant to note that the first respondent himself has specifically held in his orders dt. 7th March, 1988, and 2nd April, 1988, that the petitioner should be regarded as a miscellaneous financial company as defined under the relevant section. In such circumstances, it goes without saying that both the orders of the ITO, i.e., on the rectification petitions and also the disallowance of interest payments in the concerned assessments is not correct and the same is against law and without jurisdiction. So also, this Court has already held that the orders of the first respondent on the revision petition are also not correct and it is against the provisions of the law and therefore, liable to be set aside.

Therefore, for all the aforesaid reasons and in the facts and circumstances of this case and also in view of my above discussions with regard to the various aspects of these cases, I am of the clear view that the petitioner herein has made out a clear case in his favour and that therefore, the orders impugned in these writ petitions are liable to be quashed and all these writ petitions be allowed as prayed for. In the result, all these writ petitions are allowed as prayed for. No costs. Consequently, the orders impugned in these writ petitions are hereby quashed and the respondents herein are directed to delete the disallowance of interest under s. 40A(8)/58(2) of the IT Act that has been made in the concerned assessment.

[Citation :242 ITR 350]

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