2011 (4) TMI 1563 - AT - Income Tax

Revision u/s 263 upheld for miscomputed Section 36(1)(viii) deduction on wrongly expanded business income base

ITAT Delhi upheld the revisionary order u/s 263, holding that the assessment order granting deduction u/s 36(1)(viii) was both erroneous and prejudicial ... Validity of revisionary order passed by CIT u/s 263 - erroneous and prejudicial to the interest of revenue - twin conditions for invoking jurisdiction u/s 263 - claim not made or allowed as per the statutory provision - no specific query made in respect of correctness of the claim of deduction u/s 36(1)(viii) - deduction of 40% of the net income derived from the business - business of providing long-term finance for the activities prescribed in section 36(1)(viii) since long - HELD THAT:- In the case of Malabar Industrial Company Limited Vs. CIT [2000 (2) TMI 10 - SUPREME COURT], the Hon’ble Supreme Court held that for invoking jurisdiction u/s 263, two conditions have to be satisfied cumulatively - i) the order is erroneous; ii) it is prejudicial to the interest of the revenue. Having considered the provision contained in the section 36(1)(viii), it is clear that it has to be interpreted in a narrower sense because of the words “derived from such business of providing long-term finance”. The other words, namely, “computed under the head profits and gains of business or profession do not expand the ambit of deduction to the whole of business profit as these words only mean that income from providing long-term finance should be rightly assessable and assessed under the head “profits and gains of business or profession”. Therefore, we do not agree with the learned counsel that the provision has to be read in the widest possible terms because of the aforesaid words. A plain reading of the section shows that the assessment order was erroneous inasmuch as it failed to take into consideration the amendment brought by Finance Act, 1995. The cases cited by the learned counsel do not contain any case under which it has been held that if the order was erroneous, it cannot be made subject matter of revision by the CIT because of the reason that the Assessing Officer had considered the facts of the case and followed his own orders in earlier years. The assessment of a particular year has to be made as per law applicable to that year. If the jurisprudence undergoes change, the order has to be seen as per law prevailing at the time of passing the revisionary order. No doubt, the order of the Tribunal in the case of Gruh Finance Limited [2008 (5) TMI 357 - ITAT AHMEDABAD-A], was not there before the learned CIT, however, that is not material because the order was erroneous even on plain reading of the provision. Since it led to levy of lesser tax then the tax leviable on plain reading of the provision, it was also prejudicial to the interest of the revenue. It is held accordingly. In result, the appeal is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the prerequisites for exercise of revisionary jurisdiction under section 263, namely that the assessment order is both 'erroneous' and 'prejudicial to the interests of the revenue', were satisfied in relation to the allowance of deduction under section 36(1)(viii). 1.2 Whether, on a proper construction of section 36(1)(viii) as amended by the Finance Act, 1995, the deduction is restricted to profits 'derived from' the business of providing long-term finance, and whether the assessment order allowing deduction on the entire business profits (including interest on bank deposits, miscellaneous receipts, dividend, etc.) was contrary to such construction. 1.3 Whether past assessments allowing similar deduction, the 'consistency' principle, and the existence of allegedly 'two possible views' precluded exercise of jurisdiction under section 263. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of revision under section 263 - existence of an 'erroneous' and 'prejudicial' order (a) Legal framework as discussed 2.1 The Court referred to the settled position that jurisdiction under section 263 requires cumulative satisfaction of two conditions: (i) the assessment order must be 'erroneous'; and (ii) it must be 'prejudicial to the interests of the revenue', with reference to judicial precedents including the decisions laying down that: (i) the Commissioner cannot interfere merely because another view is possible; (ii) if the Assessing Officer has adopted a possible view, section 263 cannot be invoked; (iii) the mere absence of elaborate discussion in the assessment order does not by itself make it erroneous; and (iv) the position of law as on the date of the revisionary order is relevant. (b) Interpretation and reasoning 2.2 The Court noted that the Assessing Officer accepted the returned income and allowed deduction under section 36(1)(viii) at 40% of the 'net income derived from the business', but: (i) No specific query was raised in the assessment in respect of the correctness or scope of the claim under section 36(1)(viii); (ii) The assessment order was a brief, one-page 'summary order' accepting the return without dealing with the specific statutory requirement introduced by the Finance Act, 1995; and (iii) The Assessing Officer failed to consider that, post-amendment, deduction is confined to profits 'derived from such business of providing long-term finance'. 2.3 On a plain reading of section 36(1)(viii), the Court held that the Assessing Officer had allowed deduction on an incorrect and wider base, ignoring the restrictive expression 'derived from such business of providing long-term finance' and thus not applying the amended law. 2.4 The Court rejected the contention that the order could not be termed 'erroneous' merely because the Assessing Officer had before him past assessments in which the deduction was allowed, or because the assessee had filed details. The determinative factor was that the assessment for the relevant year had to conform to the law as applicable post-amendment, which it did not. 2.5 It was emphasised that there was no judicial authority in favour of the assessee's wider construction of section 36(1)(viii) at the time of assessment; in any case, even without any precedent, on a straightforward reading of the provision the assessment order was contrary to law. Thus, the view taken by the Assessing Officer was not a 'possible view' within the meaning of the precedents cited by the assessee. 2.6 On prejudice, the Court held that allowing deduction on profits beyond those 'derived from' the business of providing long-term finance resulted in an excessive deduction and short levy of tax, thereby rendering the order prejudicial to the interests of the revenue. (c) Conclusion on Issue 1 2.7 The Court concluded that: (i) The assessment order failed to apply the correct, narrower scope of section 36(1)(viii) after the Finance Act, 1995 amendment and thus was 'erroneous' in law. (ii) The error resulted in allowance of higher deduction and consequent short charging of tax, making it 'prejudicial to the interests of the revenue'. (iii) The Commissioner was therefore justified in invoking and exercising revisionary jurisdiction under section 263. Issue 2: Scope of deduction under section 36(1)(viii) post-amendment - meaning of 'profits derived from such business of providing long-term finance' (a) Legal framework as discussed 2.8 The Court reproduced the substantive part of section 36(1)(viii) providing that deduction is in respect of any special reserve created by specified financial entities, of 'an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head 'profits and gains of business or profession' before making any deduction under this clause)'. 2.9 The Court relied on: (i) The amendment made by the Finance Act, 1995, and Circular No. 717 dated 14.08.1995 explaining that the scope of deduction was thereby narrowed; and (ii) Jurisprudence on the expression 'derived from', particularly the decision where it was held that 'derived from' requires a proximate, direct nexus with the specified activity, as distinguished from the broader expression 'attributable to'. 2.10 The Court also referred with approval to the decision of a Coordinate Bench which, interpreting section 36(1)(viii) with reference to the Finance Act, 1995 amendment and Circular No.717, held that: (i) The 'immediate source' of the income eligible for deduction must be the business of providing long-term finance; and (ii) Discounting charges and interest on bank deposits, whose immediate source was discounting activity and bank deposits respectively, were not 'derived from' the business of providing long-term finance. (b) Interpretation and reasoning 2.11 The Court held that, because of the words 'derived from such business of providing long-term finance', section 36(1)(viii) is to be construed in a restrictive manner. Only profits having a direct and proximate nexus with the business of providing long-term finance qualify for deduction. 2.12 The phrase 'computed under the head 'profits and gains of business or profession'' was interpreted as merely identifying the head of income under which the eligible profits must fall; it does not expand the scope of deduction to encompass the entire business profits or all income assessable under that head. 2.13 On this construction, the Court held that allowing deduction on the 'entire business profits', including interest on bank deposits, miscellaneous receipts, and other incomes not directly and immediately arising from the business of providing long-term finance, was inconsistent with the statutory language post-amendment. 2.14 The Court noted that earlier years' allowance, which may have proceeded on a different statutory position, could not override the changed legal framework after the Finance Act, 1995. Each assessment year must be tested with reference to the law as applicable for that year. (c) Interaction with 'consistency' and 'two views' contentions 2.15 The Court rejected the 'consistency' argument, holding that where the statutory language has changed and clearly narrows the deduction, past practice cannot validate a contrary application of law for the current year. 2.16 The argument that, at the time of assessment, the issue was 'debatable' or susceptible to 'two views' was found untenable because, even in absence of a then-existing adverse precedent, the only permissible view on a plain reading of section 36(1)(viii) was the narrow one confining deduction to profits directly 'derived from' the business of providing long-term finance. Hence the Assessing Officer's wider view could not be treated as a legally sustainable 'possible view'. (d) Conclusion on Issue 2 2.17 The Court concluded that: (i) After the Finance Act, 1995 amendment, section 36(1)(viii) is to be strictly confined to profits 'derived from' the business of providing long-term finance, requiring a direct and proximate nexus. (ii) The expression relating to computation 'under the head 'profits and gains of business or profession'' does not authorise deduction on general business profits or on incomes whose immediate source is not the lending activity itself. (iii) The assessment order, by allowing deduction on the assessee's entire business profits including incomes such as interest on bank deposits and miscellaneous receipts, was contrary to this statutory requirement and therefore erroneous and prejudicial, justifying revision under section 263. 2.18 In consequence, the appeal challenging the revisionary order under section 263 was dismissed.