TaxTMI 
TaxTMI 
2008 (2) TMI 533
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....of the Income-tax Act, 1961. The CIT is not correct to state that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of revenue to the extent of above. The directions given by the CIT to Assessing Officer to frame the assessment afresh on these issues is unjustified, bad in law and against the facts of the case. It is prayed that the order of CIT passed under sec. 263 of the Income-tax Act, 1961 may please be cancelled." 3. The facts of the case are that the assessee is a Bank. In the return of income filed, the assessee had claimed exemption in respect of its income of Rs. 6,86,45,804 under section 10(15), Rs. 20,57,03,438 under section 10(23G) and Rs. 8,66,70,665 under section 10(33) of the Act. The total income in respect of which exemption was claimed aggregated to Rs. 36,10,19,907. The assessment was completed by the Assessing Officer under section 143(3) of the Act on 30-3-2005, wherein the Assessing Officer disallowed the exemption of income aggregating to Rs. 36.10 crores on the ground that the assessee was asked to furnish details with photocopies and documentary evidence, which had not been furnished. The Assessing Officer observed t....
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.... with effect from 1-4-1962 and was applicable to the assessment year under reference. Thus, it was mentioned that the Assessing Officer failed to examine the disallowance of proportionate interest and management expenses against the income claimed as exempt within the meaning of section 14A of the Act. Thus, it was submitted that the order passed by the Assessing Officer was erroneous and prejudicial to the interests of the revenue. The ld. CIT examined the proposal along with the case records sent by the Addl. Commissioner of Income-tax and observed that in addition to non-consideration of provisions of section 14A, the Assessing Officer had also allowed exemption in respect of income of Rs. 6,46,04,130 under section 10(23G) as per order under section 154 without examining its allowability or otherwise. He observed that the exemption under section 10(23G) was available only to 'Infrastructure Capital Fund' or 'Infrastructure Capital Company' or 'Co-operative Bank'. Since the assessee was neither an 'Infrastructure Capital Fund' or 'Infrastructure Capital Company' nor 'Cooperative Bank', the assessee was not entitled to exemption of its income under section 10(23G) of the Act. Thus....
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....al to disallow the proportionate interest and management expenses amounts to change of opinion. 3.3 As regards exemption claimed under section 10(23G) and allowed by the Assessing Officer, the assessee submitted that provisions of this section were inserted by the Finance (No. 2) Act, 1996 with effect from 1-4-1997 and ever since the assessee had been claiming and is being allowed exemption under section 10(23G). Reliance was also placed on Circular No. 762, dated 18-2-1998, which contains the Explanatory notes for insertion of this section in the Act. Para 17.4 of the Explanatory Notes explained the meaning of 'Infrastructure Capital Company' as to mean a company which has made investment by way of acquiring shares or providing long-term finance to an enterprise engaged in the business of providing infrastructure facility i.e., road, highway, bridge, airport, port, a rail system, or any other public facility of a similar nature. It was submitted that since the assessee was an 'Infrastructure Capital Company' and the amounts were invested in shares or providing long-term finance to the enterprises carrying on infrastructure facility, the assessee had rightly claimed and was allo....
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....was having both interest bearing as well as own funds in a common pool and the assessee has not been able to pin-point that the funds utilised to earn exempt income were out of interest-free funds. He also referred to the various judgments relied upon by the ld. counsel and observed that most of those judgments related to computation of dividend income for the purpose of claiming deduction under section 80M of the Act. He observed that the decision of ITAT, Amritsar Bench, for the assessment year 1992-93 was also with reference to deduction under section 80M where the Tribunal, held that the apportionment of 10 per cent of the dividend income earned by the assessee was not done on reasonable basis. He also observed that two judgments of Hon'ble Bombay High Court in the cases of General Insurance Corporation of India (No. 1) and Central Bank of India also related to section 80M. The decision of ITAT, Indore Bench in the case of State Bank of Indore v. CIT in [MA No. 1775 of 2004] related to section 80M and not to the provisions of section 14A of the Act. Therefore, those were distinguishable. He also referred to the decision of ITAT, Delhi Bench in the case of Maruti Udyog Ltd., whe....
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....not mean that all banks were entitled to claim benefit under section 10(23G). He also referred to the judgment of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. and observed that in this case twin conditions stipulated under section 263 were duly met. He also found that the judgment of Hon'ble Supreme Court in the case of G.M. Mittal Stainless Steel (P.) Ltd. was not applicable to the facts of the present case because the proposed action under section 263 was not based on divergent views expressed by different High Courts. Thus, the ld. CIT(A) held that the order under section 143(3) read with section 154 of the Act was erroneous and prejudicial to the interests of the revenue and accordingly cancelled the same to the extent mentioned above with the direction that the Assessing Officer should frame the assessment afresh on the above issue as per law after giving the assessee adequate opportunity of being heard. The assessee is aggrieved with the order of the CIT. Hence, this appeal before this Bench. 5. The ld. counsel for the assessee, Sh. R.K. Gupta, reiterated the submissions made before the authorities below. He referred to the assessment order dated 30-3-2....
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....d that during the course of revision proceedings under section 263, it was pointed out to the CIT that the assessee had sufficient interest-free funds, which were invested in making investments in shares and providing long-term finances to enterprises engaged in providing infrastructural facility. Therefore, no disallowance of interest was called for. Reliance was placed on the decision of the ITAT, Amritsar Bench in the case of the assessee in ITA No. 68 (Asr.)/1997 for the assessment year 1992-93 (a copy of order placed at pages 13 to 15 of the paper book), where the Assessing Officer had disallowed 10 per cent of the expenses against dividend income for claiming deduction under section 80M. However, the ld. CIT(A) had considered the disallowance of Rs. 25,000 as fair and reasonable. On appeal, the Tribunal upheld the order of the CIT(A). He further submitted that the CIT is not correct in holding that the proportional administrative expenses have to be disallowed for computing income claimed exempt under the aforesaid sections of the Act. He submitted that the judgment of the Hon'ble Supreme Court in the case of United General Trust Ltd. relied upon by the ld. CIT is with refere....
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.... of disallowance of expenses under section 14A. He submitted that the CIT has not applied his independent mind and was merely guided by the proposal submitted by the Addl. CIT. He submitted that such action of the CIT was bad in law. He relied on the judgment of Hon'ble Gauhati High Court in the case of B&A Plantation & Industries Ltd. v. CIT [2007] 290 ITR 395, where order under section 263 was struck down because such action was taken merely on the basis of objection raised by the Internal Audit Party without independent application of mind. 5.1 As regards the claim of the assessee for exemption of its income under section 10(23G), the ld. counsel submitted that the assessee is covered by the expression 'Infrastructure Capital Company'. He referred to CBDT's Circular No. 762, dated 18-2-1998, whereby the purpose of expanding the scope of exemption under section 10(23G) was explained. It has been mentioned therein that the purpose of expanding the scope, exemption is to attract further investment in the infrastructure facility by providing more tax incentive to investors. He referred to para 17.4 of the said Circular which explains the meaning of expression 'Infrastructure Capi....
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....ccepted by the Assessing Officer for both the earlier years as well as subsequent years after examining the relevant details and proper enquiry. Therefore, relying on the judgment of Hon'ble Gujarat High Court in the case of CIT v. Arvind Jewellers [2003] 259 ITR 502, the ld. counsel submitted that the order passed by the CIT deserves to be set aside. 6. The ld. DR, on the other hand, heavily relied on the order of the CIT, Jammu and also filed written submissions. He drew our attention to the memorandum explaining the proposed amendment to the Finance (No. 2) Bill, 1996 vide which the provisions of section 10(23G) had been brought to statute. He submitted that 2nd para of the said circular explains the purpose of providing tax exemption to such infrastructure capital funds and Infrastructure capital companies, which are established for the purposes of mobilising the resources for financing the Enterprises engaged in providing the infrastructure facilities. He submitted that in the present case, the assessee is not an 'Infrastructure Capital Company' because it has not been established for the purpose of mobilising the resources for financing infrastructural facilities. Thus, he....
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....t making valid enquiries which are called for on the facts of the case. (iv) The decision of ITAT, Delhi Bench in the case of Kotdwar Steel Ltd. v. Asstt. CIT, Cir-2, Dehradun, in ITA No. 1311/Delhi/2006 for the assessment year 2002-03, reported in 2007-TIOL-95-ITAT-Del. In this case, the Tribunal upheld the order passed under section 263 on the ground that there were grey submissions made by the assessee for which detailed enquiries were called for. Failure to do so made the assessment order as erroneous and prejudicial to the interest of the revenue. (v) The decision of ITAT, Chandigarh Bench in the case of Ind Sphinx Precision Ltd. v. CIT [2007] 11 SOT 498 in ITA Nos. 549 and 550/Chandi/2004 for the assessment years 2000-01 and 2001-02, reported in 2007-TIOL-247-ITAT-CHD. In this case, the order passed under section 263 by the CIT was upheld because the assessment order was passed without giving any reasons for accepting the contentions of the assessee and that too against jurisdictional Tribunal. (vi) The decision of ITAT, Amritsar Bench, in the case of Sexa Securities & Finance Co. Ltd. v. ITO, Ward 12(2), N. Delhi, in ITA No. 2308/Delhi/2004 for the assessment ....
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.... at the time of completing the assessments and even at the time of passing order under section 154, the Assessing Officer did not take into account the provisions of section 14A of the Act. Section 14A of the Act provides that for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under this Act. The CBDT has also clarified the meaning of income used in clause (23G) of section 10 vide Circular No. 780, dated 4-10-1999 where it was mentioned that it is the net income after taking into account all expenses incurred to earn the same that is exempt under section 10(23G) of the Act. The Board has also clarified that the term "Income" as used in the said section refers to income as computed under the provisions of the Income-tax Act, 1961 and, therefore, it is not the "gross receipts" but the "Net income" of the nature referred to in the said clause. In any case, section 14A refers to expenditure incurred in relation to income which does not form part of the total income under this Act. The assessee had claimed exemption of its income....
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.... ** (ii) ** ** ** (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 Commissioner; (c) Where any order referred to in this sub-section and passed by the Assessing Officer had been the subject-matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner 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-section (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-section (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....
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....r this issue, we have to first find out the meaning of expressions used in the section an assessment order being 'erroneous' and 'prejudicial to the interests of the revenue'. This issue was also considered by the Hon'ble Supreme Court in the aforesaid case of Malabar Industrial Co. Ltd. The Hon'ble Apex Court held that the expression 'erroneous' would mean an incorrect assumption of facts or an incorrect application of law. The Apex Court further observed that even the assessment orders passed without applying principles of natural justice or without application of mind would be regarded as erroneous. As regards the expression 'prejudicial to the interests of the revenue', the Apex Court observed that this is not an expression of art and was not defined in the Act. However, it was observed that in its ordinary meaning, it is of wide import and was not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to erroneous order of the ITO, the revenue is loosing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The Hon'ble ....
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....e and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law." From a bare reading of the above judgment, it is clear that the twin conditions laid down in section 263 must be satisfied simultaneously before assuming jurisdiction by the CIT. However, the Supreme Court has also clarified that if the Assessing Officer has taken one of the courses permissible in law 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 or prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. 7.2 Now the present case also requires to be decided by applying the above tests laid down by the Apex Court i.e. whether the twin conditions laid down for exercise of powers under section 263 by CIT could be considered to have been satisfied. 7.3 Now admittedly, the failure on the part of the Assessing Officer to consider the provisions of section 14A while allowing exemption in respect of i....
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....in respect of dividend income of Rs. 2,13,60,578 under section 80M of the Act. The Assessing Officer had disallowed expenses of Rs. 21,36,579 at the rate of 10 per cent of the gross amounts of dividends. However, on appeal, the ld. CIT(A) restricted the disallowance to Rs. 25,000 on the ground that there was only one clerk working in the Investment Department who received warrant from Unit Trust of India and deposited with the bank for collection. On further appeal, the Tribunal upheld the order of CIT(A). The said decision is confined to its own facts, where dividend income was shown at meagre amount of Rs. 2.13 crores from the UTI, and the issue related to deduction under section 80M. The case was not considered from the point of disallowance to be made under section 14A in respect of income claimed as exempt. For the assessment year under consideration, the assessee has earned huge amount of income of Rs. 36.10 crores which was claimed exempt. The total investment for earning such income must be more than 300 crores. There has got to be a team of professionals for research, planning, monitor, management of the investment port folio. One clerk cannot manage huge amount of investm....
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....made. However, there is unanimity of the view in all the decisions that expenditure incurred in relation to income claimed exempt which does not form part of income has got to be disallowed as per provisions of section 14A. In the case of Maruti Udyog Ltd., the Tribunal has held that any expenditure which is proved to have nexus directly or indirectly with the funds for earning exempt income has to be disallowed. The extent and magnitude of disallowance is to be determined at the time of completing the assessment. But this does not vitiate the order of CIT, Jammu, so far it relates to non-consideration of disallowance of expenditure under section 14A of the Act. The decision of the ITAT, Delhi Bench in the case of Sexa Securities & Finance Co. Ltd. is directly on the issue where the order passed by the CIT under section 263 on account of non-consideration of disallowance of expenses under section 14A was held to be valid in law. Therefore, this decision also supports the case of the revenue. As regards the contention of the assessee that the order passed under section 263 is bad in law because he has acted merely on the proposal of Addl. Commissioner of Income-tax without independe....
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....ade on or after the 1st day of June, 1998 by way of shares of long-term finance in any enterprise or undertaking wholly engaged in the business referred to in sub-section (4) of section 80-IA or a housing project referred to in sub-section (10) of section 80-IB or a hotel project or a hospital project and which has been approved by the Central Government on an application made by it in accordance with the rules made in this behalf and which satisfies the prescribed conditions. Explanation 1.-For the purposes of this clause,- (a) "infrastructure capital company" means such company as has made investments by way of acquiring shares or providing long-term finance to an enterprise wholly engaged in the business referred to in this clause; (b) "infrastructure capital fund" means such fund operating under a trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908) established to raise monies or providing long-term finance to an enterprise wholly engaged in the business referred to in this clause; (c) ** (d) "long-term finance" shall have the meaning assigned to it in clause (viii) of sub-section (1) of section 36; (e) "co-operative bank" shal....
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....for accelerating the economic development of the country, the existing provisions of the Income-tax Act provide a five year tax holiday to an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility. However, in order to attract further investment to this sector, an urgent need has been felt for providing more tax incentives to investors. 17.2 The Act, therefore, provides tax exemption to such infrastructure capital funds and companies which are established for the purposes of mobilising resources for financing infrastructure facilities. 17.3 Accordingly, any income by way of dividends, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company from investment made by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility which fulfils the conditions specified in sub-section (4A) of section 80-IA has been exempted from income-tax. 17.4 The expression 'infrastructure capital fund' shall mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908 e....
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....y. Therefore, all the conditions laid down for claiming exemption under section 10(23G) are fulfilled by the assessee. Therefore, we are of the opinion that it is not proper to take a narrow view of the issue when the assessee had in fact made investments in shares and financed the enterprises engaged in providing infrastructure facilities on long-term basis. We therefore, feel that it is not necessary that the 'Infrastructure Capital Company' should be formed solely for the purpose of mobilising resources for financing infrastructure facilities. If it includes one of the objects of the Banking business, the same should be sufficient to entitle the assessee to claim exemption of its income under section 10(23G). This view also finds support from the fact that subsequently this benefit of section 10(23G) has been extended to Co-operative Banks, though such banks have also not been set up for the purpose of mobilising resources for financing the infrastructure facilities. Therefore, we are of the opinion that the assessee falls in the category of 'infrastructure capital company' entitled to exemption under section 10(23G). 9.1 The view that banks are entitled to exemption of its i....