High Court Of Madras
CIT vs. Pathy Cine Enterprises
Sections 260A, 263
Asst. Year 2000-01
P.D. Dinakaran & P.P.S. Janarthana Raja, JJ.
Tax Case (Appeal) No. 2446 of 2006
26th October, 2006
Counsel Appeared
Mrs. Pushya Sitaraman, for the Appellant
JUDGMENT
P.D. DINAKARAN, J. :
In this appeal directed against the order dt. 17th March, 2006 of the Tribunal made in ITA No. 1249/Mds/2004, the following questions were formulated as substantial questions of law arising for consideration : “(i) Whether in the facts and circumstances of the case, the Tribunal was right in holding that income from hiring of air conditioners to its directors as ‘income from business’ ? and (ii) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the exercise of power under s. 263 of the IT Act by the CIT was erroneous ?”
2.1. To learn as to how these questions arose, we may refer, in brief, to the facts of the case : The relevant assessment year is 2000-01. The assessee admitted the lease rent received from M/s Blue Star Ltd., as “income from house property” after allowing the statutory deductions. The assessee also admitted “net loss” of Rs. 5,75,580 as “income from business” derived from the business of hiring of air conditioners. The AO accepted the income as shown in the return.
2.2. Alleging underassessment of income by the assessee, the CIT issued a notice dt. 8th Jan., 2004 under s. 263 of the IT Act (for brevity, “the Act”), to show cause as to why the order of assessment should not be revised, thereby proposing to treat the income derived from the hiring of air conditioners to the marriage halls belonging to the directors of the assessee company as “income from other sources”.
2.3. In response to the said show-cause notice, the assessee submitted that the only business of the assessee from its inception since two decades was leasing of air conditioners and the lease was initially made to M/s Blue Star, Chennai and M/s Syndicate Bank, Chennai and after expiry of the lease to these two concerns, the assessee company leased out the air conditioners for use in the marriage hall owned by one of directors and therefore, there was a continuous business activity of leasing of machinery during the previous year ending 31st March, 2000 and consequently, the expenditure debited to the income and expenditure account were actually incurred wholly and exclusively for the conduct of the business.
2.4. The CIT, however, in his order dt. 5th March, 2004, held that the assessee never had carried on any organised and systematic activity of the business of hiring of air conditioners and refused to grant the statutory allowance under the head “Income from house property” and held that the expenses claimed have no nexus with rental income from hiring of air conditioners and accordingly, treated the income from hiring of air conditioners as “Income from other sources”.
On appeal by the assessee, the Tribunal, appreciating the explanation offered by the assessee, that the assessee company was pursuing the business as per the main object clause of its memorandum of association and that the assessee has been doing the same line of business and submitting its returns consistently on the same basis for nearly two decades, came to the conclusion that the only difference which arose is that earlier the air conditioners were hired to other parties and during the impugned assessment year, the assessee had hired the air conditioners to marriage hall run by one of its directors and as a consequence, set aside the revision order under s. 263 of the Act. Hence, the above appeal raising the substantial questions of law referred to above. Since the second question of law raised forms the basis for deciding the issues in this appeal, we propose to deal with both the questions jointly.
It is apt to refer s. 263 of the IT Act, which provides a revision jurisdiction to the CIT to revise the orders prejudicial to the Revenue. Sec. 263 of the IT Act reads as under : “Sec. 263. Revision of orders prejudicial to Revenue.—(1) The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of this subsection,— (a) an order passed on or before or after the 1st day of June, 1988, by the AO shall include— (i) an order of assessment made by the Asstt. CIT or Dy. CIT or the ITO on the basis of the directions issued by the Jt. CIT under s. 144A;
(ii) an order made by the Jt. CIT in exercise of the powers or in the performance of the functions of an AO conferred on, or assigned to him under the orders or directions issued by the Board or by the Chief CIT or Director General or CIT authorised by the Board in this behalf under s. 120; (b) ‘record’ shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the CIT; (c) where any order referred to in this sub-section and passed by the AO had been the subject-matter of any appeal, filed on or before or after the 1st day of June, 1988 the powers of the CIT under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. (2) No order shall be made under sub-s. (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-s. (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation.—In computing the period of limitation for the purposes of sub-s. (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to s. 129 and any period during which any proceeding under this section is stayed by an order or injunction of any Court shall be excluded.”
5. The apex Court in Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) considered the scope of the revisionary jurisdiction of the CIT under s. 263 of the Act for revising the orders prejudicial to the Revenue and held as under : “A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the CIT suo motu under it, is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue. The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent—if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue—recourse cannot be had to s. 263(1) of the Act There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the AO, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
The phrase prejudicial to the interests of the Revenue is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. vs. S.P. Jain (1957) 31 ITR 872 (Cal), the High Court of Karnataka in CIT vs. T. Narayana Pai (1975) 98 ITR 422 (Kar), the High Court of Bombay in CIT vs. Gabrial India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom) and the High Court of Gujarat in CIT vs. Smt. Minalben S. Parikh (1995) 127 CTR (Guj) 333 : (1995) 215 ITR 81 (Guj) treated loss of tax as prejudicial to the interests of the Revenue……….
The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the AO accepting the same as such will be erroneous and prejudicial to the interests of the Revenue—Rampyari Devi Saraogi vs. CIT (1968) 67 ITR 84 (SC) and Smt. Tara Devi Aggarwal vs. CIT 1973 CTR (SC) 107 : (1973) 88 ITR 323 (SC).”
After referring to the facts and the law enunciated in the decision referred supra, it is clear that what was not prejudicial to the Revenue for two decades cannot be construed as prejudicial to the Revenue for the impugned assessment year, merely because the lessee happens to be one of the directors of the assessee company, as it is well settled that the phrase “prejudicial to Revenue” must be read in conjunction with an erroneous order. In any event, when there are sufficient materials to support the claim of the assessee to treat the income derived from the hiring of air conditioners as business income for over two decades, the CIT has no authority to invoke the revisionary jurisdiction under s. 263 of the Act, merely on surmise that the order of the AO is erroneous or the order is prejudicial to the Revenue, on the ground of change of the lessee. Hence, in our considered opinion, the Tribunal had rightly held that the CIT had erroneously exercised the power under s. 263 of the Act. That apart, it is well settled in law vide Smt. Kavit Sanghi vs. CIT (1982) 133 ITR 48 (MP) that, in the absence of any material to show that the air conditioning plant was not acquired by the assessee as a commercial asset and was acquired for any other purpose by the assessee, the income derived from the hiring of the air conditioning plant was chargeable as profits and gains from business and not as income from other sources.
In the instant case, as referred to in the order of the Tribunal, the object clause of the memorandum of association of the assessee company specifies the object of the company is to carry on the business of running cinema house and lease out the climate control device and other machineries and as the assessee could not get the no objection certificate for running the cinema house, it was carrying on the business by regularly leasing out the air conditioners. Merely because of the change in the parties to whom the air conditioners were leased, in our considered opinion, would not be a conclusive premise to change the assessment of the same from the head “Business income” to “Income from other sources”.
For the reasons aforesaid, finding no substantial question of law arises, this appeal is dismissed.
[Citation : 292 ITR 495]
