FELLOWSHIP CORPORATION, MUMBAI v. ITO 19(2)(3), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F BEFORE SHRI N.V. VASUDEVAN (JM) & PRAMOD KUMAR (AM) I.T.A.NO. 3019/MUM/2009 (ASSESSMENT YEAR : 1997-98 ) FELLOWSHIP CORPORATION 159 CST ROAD KALINA SANTACRUZ EAST MUMBAI-400 098. VS. ITO 19(2)(3) M.K. ROAD AAYAKAR BHAVAN MUMBAI-400 020. APPELLANT RESPONDENT PAN/GIR NO. : AAAFF0775B ASSESSEE BY : MS. VASANTI PATEL DEPARTMENT BY : SHRI A.P. SINGH ORDER PER N.V. VASUDEVAN JM :- THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 20.3.2009 OF LEARNED CIT-XIX MUMBAI IN EXERCISE OF HIS POWER U/S. 263 OF THE ACT. 2. FACTS AND CIRCUMSTANCES UNDER WHICH THE ORDER U /S. 263 WAS PASSED BY LEARNED CIT ARE AS FOLLOWS :- THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF TRADING AND INVESTMENT IN SHARES & SECURITIES AND A LSO FINANCE. THE ASSESSEE FILED RETURN OF INCOME ON 29.10.1997 DECLA RING A LOSS OF RS. 1 03 64 180/-. THE ASSESSMENT WAS COMPLETED U/S. 14 3(3) ON 27.3.2000 DETERMINING THE LOSS AT RS. 79 57 547/- AFTER DISAL LOWING FINANCIAL CHARGES OF RS. 20 56 307/- AND INTEREST RECEIVED ON DEBENTURES OF RS. 3 50 327/-. THEREAFTER PENALTY OF RS. 8 22 523/- WA S LEVIED U/S. 271(1)(C) VIDE ORDER DATED 30.3.2005. SINCE THE ORDER QUANTU M ASSESSMENT ORDER IN RESPECT OF WHICH PENALTY WAS LEVIED WAS SET ASID E BY THE MUMBAI ITAT H BENCH VIDE ORDER NO. ITA NO. 634 & 635/MUM/2004 DATED 28.11.2006 WITH DIRECTIONS TO THE ASSESSING OFFICE R FOR DECIDING THE FELLOWSHIP CORPORATION 2 ISSUE OF DISALLOWANCE OF DISCOUNTING CHARGES AFRESH THE PENALTY ORDER WAS ALSO QUASHED BY LEARNED CIT(A)-XIX VIDE ORDER D ATED 22.2.2007. HOWEVER THE ASSESSEE DID NOT PRODUCE ANY ADDITIONA L DETAILS OTHER THAN THOSE PRODUCED BEFORE THE ASSESSING OFFICER AT THE TIME OF FINALIZATION OF ORIGINAL ASSESSMENT. AS THE ASSESSEE COULD NOT PROV E THE PAYMENT OF DISCOUNTING CHARGES AND VARIOUS EXPENSES CLAIMED VI DE DEBIT NOTES THE SAME WERE DISALLOWED AND ADDED BACK TO THE INCOME O F THE ASSESSEE PER ORDER U/S. 143(3) R.W.S. 254 OF THE I.T. ACT DATED 19.12.2007. PENALTY PROCEEDINGS U/S. 271(1)(C) WERE AGAIN INITIATED IN THE SAID ORDER AND SHOW CAUSE NOTICE WAS ISSUED AND SERVED ON THE ASSE SSEE. 3. IN THE COURSE OF PENALTY PROCEEDINGS THE ASSE SSEE VIDE ITS LETTER DATED 15.1.2008 SUBMITTED THAT IN VIEW OF DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF VIRTUAL SOFT SYSTEMS V S. CIT 289 ITR 83 THE PENALTY PROCEEDINGS INITIATED AGAINST THE ASSES SEE SHOULD BE DROPPED AS THE RETURNED INCOME WAS A LOSS AND THE ASSESSED INCOME WAS ALSO A LOSS. IN VIEW OF THE RATIO LAID DOWN BY HON'BLE SUP REME COURT IN THE CASE OF VIRTUAL SOFT SYSTEMS VS. CIT 289 ITR 83 THE PE NALTY PROCEEDINGS WERE DROPPED BY THE ASSESSING OFFICER VIDE ORDER DATED 2 2.5.2008 AS ON THE DATE OF PASSING THE SAID ORDER OF HON'BLE SUPREME C OURT DECISION IN THE CASE OF VIRTUAL SOFT SYSTEMS (SUPRA) WAS BINDING ON THE ASSESSING OFFICER. THE PENALTY PROCEEDINGS WERE NOT DROPPED O N MERITS BUT ONLY BECAUSE OF THE DECISION OF THE HON'BLE SUPREME COUR T REFERRED TO ABOVE. THIS DECISION OF SUPREME COURT WAS REVERSED IN THE CASE OF CIT-1 AHMEDABAD VS. GOLD COIN HEALTH FOOD PVT. LTD. 304 ITR 308. THE HON'BLE SUPREME COURT IN THIS CASE HELD THAT THE VI EW EXPRESSED IN CASE OF VIRTUAL SOFT SYSTEMS VS. CIT IS NOT CORRECT. THE HON'BLE SUPREME COURT FURTHER HELD THAT THE EXPLANATION 4 TO SECTIO N 271(1)(C) IS CLARIFICATORY IN NATURE AND NOT SUBSTANTIVE IN NATU RE. SINCE THE SAID AMENDMENT HAS BEEN HELD TO BE CLARIFICATORY IN NATU RE IT IS APPLICABLE RETROSPECTIVELY AND SINCE THE PENALTY PROCEEDINGS U /S. 271(1)(C) WERE DROPPED ON THE BASIS OF A DECISION OF THE COURT WHI CH IS NO LONGER VALID FELLOWSHIP CORPORATION 3 THE CIT IN EXERCISE OF POWERS OF REVISION U/S. 263 OF THE ACT WAS OF THE VIEW THAT THE ORDER OF THE AO DATED 22.05.08 WAS E RRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. A SHOW CAUSE NOTICE U/S.263 OF THE ACT DATED 30.1.2009 FIXING HEARING ON 12.2.2009 WAS ISSUED AND SERVED ON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ORDER DROPPING THE PENALTY U/S. 271(1)(C) SHOULD NOT BE SET ASIDE AS T HE SAME IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. 4. IN RESPONSE TO SHOW-CAUSE NOTICE ISSUED U/S. 2 63 THE ASSESSEE TOOK A STAND THAT WHEN TWO VIEWS ARE POSSIBLE AND A SSESSING OFFICER HAS ADOPTED ONE VIEW WITH WHICH THE LEARNED CIT DOES N OT AGREES IT IS NOT POSSIBLE TO INVOKE POWERS U/S. 263 OF THE ACT. LEAR NED CIT HOWEVER REJECTED THE CONTENTION RAISED ON BEHALF OF THE ASS ESSEE AND HELD THAT THE CASE OF THE ASSESSEE WAS NOT A CASE WHERE TWO VIEWS WERE POSSIBLE. LEARNED CIT HELD THAT SUBSEQUENT DECISION OF THE LA RGER BENCH OF HON'BLE SUPREME COURT IN THE CASE OF GOLD COIN HEALTH CARE (SUPRA) RENDERS THE EARLIER VIEW TAKEN BY HON'BLE SUPREME COURT IN THE CASE OF VIRTUAL SOFT SYSTEMS (SUPRA) NOT LAYING DOWN CORRECT LEGAL POSIT ION. LEARNED CIT ALSO RELIED ON THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SESHASAYEE PAPER BOARD 217 ITR 358 (MAD) AND U LTIMATELY CAME TO THE CONCLUSION THAT IT IS POSSIBLE TO REVISE AN ASS ESSMENT ORDER U/S. 263 ON THE BASIS OF SUBSEQUENT DECISION OF THE HONBLE SUPREME COURT. LEARNED CIT ALSO RELIED ON THE DECISION OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. BRIJ BHUSHAN 275 ITR 360. 5. AGGRIEVED BY THE ORDER PASSED BY LEARNED CIT(A) U/S. 263 OF THE ACT THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFO RE THE TRIBUNAL. 6. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT WHILE DROPPING PENALTY PROCEEDINGS THE ASSESSING OFFICER ACTED IN ACCORDANCE WITH LAW LAID DOWN BY HON'BLE SUPREME COURT IN THE CASE OF V IRTUAL SOFT SYSTEMS (SUPRA); AND THEREFORE IT CANNOT BE SAID WHAT THE ASSESSING OFFICER DID FELLOWSHIP CORPORATION 4 WAS ERRONEOUS. IN THIS REGARD OUR ATTENTION WAS DR AWN TO THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF G.M. MITTAL ST AINLESS STEEL P. LTD. 263 ITR 255 (SC); WHEREIN HON'BLE SUPREME COUR T HELD THAT WHERE AN ASSESSMENT ORDER HAS BEEN PASSED BY THE ASSESSIN G OFFICER ON THE BASIS OF A VIEW EXPRESSED BY JURISDICTIONAL HIGH CO URT AND WHERE SUCH DECISION OF HIGH COURT IS NOT UNDER APPEAL TO THE S UPREME COURT THE CIT CANNOT REVISE THE ORDER OF THE ASSESSING OFFICER EV EN IF HIGH COURTS DECISION IS SUBSEQUENTLY SET ASIDE BY THE SUPREME C OURT. HE ALSO RELIED ON THE DECISION OF HON'BLE GUJARAT HIGH COURT IN TH E CASE OF GARDEN SILK MILLS LTD. VS. CIT 221 ITR 861 (GUJ); WHEREIN IT H AS BEEN LAID DOWN THAT WHERE THE ASSESSING OFFICER FOLLOWS THE DECISION OF JURISDICTIONAL HIGH COURT THE LEARNED CIT CANNOT EXERCISE POWERS OF RE VISION U/S. 263 ON SUCH ORDERS. RELIANCE WAS ALSO PLACED ON THE DECISI ON OF HON'BLE GAUHATI HIGH COURT IN THE CASE OF MEGHALAYA PLYWOOD LTD. VS . CIT 106 TAXMAN 89 (GAU); WHEREIN IT HAS BEEN HELD THAT WHERE THE A SSESSING OFFICER MAKE AN ASSESSMENT IN ACCORDANCE WITH LAW APPLICABLE AT POINT OF TIME WHEN HE MAKES AN ASSESSMENT AS INTERPRETED BY HIGH COURT OR APEX COURT; AND SUBSEQUENTLY THERE IS CHANGE OF LAW THAT CANNOT BE A GROUND FOR EXERCISING POWERS OF REVISION U/S. 263 OF THE ACT. RELIANCE WAS ALSO PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MAX INDIA LTD. 295 ITR 282 (SUPREME COURT). IN TH E AFORESAID DECISIONS TWO VIEWS PREVAILED WITH REGARD TO EXPRESSION PROF ITS AS USED IN SECTION 80HHC OF THE ACT. LATER ON LAW WAS RETROSPECTIVELY AMENDED. IN THE CONTEXT OF THE AMENDED LAW LEARNED CIT EXERCISED P OWER U/S. 263 OF THE ACT. THE HON'BLE SUPREME COURT HELD THAT THE LAW PR EVAILING PRIOR TO THE RETROSPECTIVE AMENDMENT SHOULD ALONE BE RELEVANT AN D THE RETROSPECTIVE AMENDMENT CANNOT BE THE BASIS TO EXERCISE POWERS U/ S. 263 OF THE ACT. 7. LEARNED DR SUBMITTED THAT THE ASSESSING OFFICER FOLLOWED AN ERRONEOUS DECISION AND THEREFORE CIT WAS JUSTIFIED IN HOLDING THE SAME TO BE ERRONEOUS. ACCORDING TO HIM THE FACT THAT THE D ECISION RELIED UPON BY THE ASSESSING OFFICER FOR DROPPING THE PENALTY PROC EEDINGS WAS FELLOWSHIP CORPORATION 5 SUBSEQUENTLY REVERSED BY HON'BLE SUPREME COURT (BY LARGER BENCH) COULD ONLY MEAN THAT THE EARLIER VIEW WAS ERRONEOUS . CONSEQUENTLY THE ASSESSING OFFICERS ORDER FOLLOWING EARLIER VIEW WA S ALSO ERRONEOUS. ACCORDING TO HIM LEARNED CIT HAS RIGHTLY EXERCISED JURISDICTION U/S. 263. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN OUR VIEW DECISION OF HON'BLE GAUHATI HIGH COURT IN THE CASE OF MEHALAYA PLYWOOD LTD. (SUPRA) IS SQUARELY APPLY TO THE FACTS OF THE PRESENT CASE. FACTS IN THE AFORESAID CASE WAS AS FOLLOWS. THE ASSESSING OFFICER TREATED TRANSPORT SUBSIDY RECEIVED BY THE ASSESSEE AS NON-TAXABLE FOR A.Y. 19 94-95 TO 1996-97. IN COMING TO THE AFORESAID CONCLUSION THE ASSESSING O FFICER FOLLOWED THE DECISION OF HON'BLE GAUHATI HIGH COURT IN THE CASE OF CIT VS. ASSAM ASBESTOS LTD. 215 ITR 847 (GAU). SUBSEQUENTLY HON 'BLE SUPREME COURT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LTD. VS. CIT 228 ITR 253 (SUPREME COURT ) LAID DOWN CERTAIN PRINCIPLES REGAR DING TAXABILITY OF SUBSIDY. BASED ON THOSE PRINCIPLES LEARNED CIT SOU GHT TO REVISE ORDER OF THE ASSESSING OFFICER IN EXERCISE OF POWERS U/S. 26 3 OF THE ACT. THE HON'BLE GAUHATI HIGH COURT HELD THAT THE ORDER U/S. 263 CANNOT BE SUSTAINED. FOLLOWING WERE THE OBSERVATIONS OF HON'B LE HIGH COURT :- THE ASSESSING OFFICER IS OBLIGATED TO MAKE ASSESSM ENT IN ACCORDANCE WITH THE LAW APPLICABLE AT THE POINT OF TIME AS INTERPRETED BY HIGH COURT. A DIVISION BENCH OF THE COURT IN CIT VS. ASSAM ASBESTOS LTD. (1995) 215 ITR 847 (GAU) HA D ALREADY DECIDED THAT TRANSPORT SUBSIDY IS NOT A TAXABLE ITE M. THE SLP PREFERRED BY THE DEPARTMENT AGAINST THE JUDGMENT WA S DISMISSED BY THE APEX COURT. IT WAS ON THE BASIS OF THE SAID DECISION THAT THE AO MADE ASSESSMENT ORDERS FOR THE YEARS 1994-95 19 95-96 AND 1996-97 ON 9TH JUNE 1997 AND 31ST MARCH 1997 TREA TING TRANSPORT SUBSIDY AS NOT TAXABLE. THE CIT THEREFOR E CLEARLY ERRED IN HOLDING THAT THE ASSESSMENT ORDERS WERE ERRONEOU S. THE QUESTION WHETHER THE SUBSEQUENT CHANGE OF LAW CAN B E A GROUND FOR EXERCISING THE POWER OF SUO MOTO REVISION UNDER SECTION 263 CAME UP FOR CONSIDERATION IN CIT VS. G.M. MITTAL ST AINLESS STEEL (P) LTD. (2003) 179 CTR (SC) 553; WHEREIN HON'BLE APEX COURT HELD THAT SUCH POWER IS NOT AVAILABLE. THUS THE CORRECT LEGAL POSITION ARE THAT THE POWER OF LEARNED CIT UNDER SECTION 263 MUST BE EXERCISED ON THE BASIS OF FELLOWSHIP CORPORATION 6 THE MATERIAL THAT WAS AVAILABLE TO HIM WHEN THE EXE RCISED THE POWER; THAT IF THE ASSESSMENT ORDER WAS MADE ON THE BASIS OF OPERATING DECISION OF A JURISDICTIONAL HIGH COURT IT CANNOT BE HELD THAT SUCH AN ASSESSMENT ORDER IS ERRONEOUS AND THAT THE FACT THAT THE APEX COURT HAD SUBSEQUENTLY REVERSED THE DECISI ON OF HIGH COURT CANNOT BE GROUND FOR INVOKING THE SUO MOTO RE VISIONAL POWER OF THE LEARNED CIT UNDER SECTION 263. THUS IT IS THE LAW AS LAID DOWN BY THE HONBLE SUPR EME COURT AS ON THE DATE WHEN THE AO PASSED HIS ORDER THAT WOULD BE REL EVANT. THE AO HAD NO OTHER OPTION EXCEPT TO FOLLOW THE SAME. THE SUB SEQUENT DECISION OF THE HONBLE SUPREME COURT REVERSING THE EARLIER DEC ISION CANNOT BE THE BASIS FOR THE CIT TO EXERCISE POWERS U/S.263 OF THE ACT. IT IS NO DOUBT TRUE THAT THE REVENUE IS LEFT WITHOUT ANY REMEDY. B UT THAT CANNOT BE THE REASON TO UPHOLD THE ORDER U/S. 263 OF THE ACT. IN THE LIGHT OF THE DECISION OF HON'BLE GAUHATI HIGH COURT WE HOLD THA T THE ORDER OF THE ASSESSING OFFICER AS ON THE DATE WHEN HE DROPPED TH E PENALTY PROCEEDINGS CANNOT BE SAID TO BE ERRONEOUS. LEARNE D CIT WAS THEREFORE NOT JUSTIFIED IN EXERCISING HIS POWER U/S. 263 OF T HE ACT. WE THEREFORE QUASH THE ORDER OF LEARNED CIT U/S. 263 OF THE ACT AND ALLOW THE APPEAL OF THE ASSESSEE. 9. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER HAS BEEN PRONOUNCED ON 30 TH DAY OF APRIL 2010. SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER SD/- (N.V. VASUDEVAN) JUDICIAL MEMBER DATED : 30 TH APRIL 2010 COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT CONCERNED. 5. THE DR CONCERNED MUMBAI 6. GUARD FILE BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI PS