Commissioner of Income Tax vs Himachal Pradesh Financial Corpn.

Sanjay Karol, J,

In exercise of its power u/s 256(1) of the Income Tax Act (hereinafter referred to as Act), the Tribunal, Chandigarh Bench, Chandigarh, has referred the following questions for our opinion:

(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the assessee''s claim regarding interest due on sticky loans ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the discount of Rs. 10,050 pertaining to bonds issued upto 31-3-1976 and thus relating to assessment year 1976-77 was allowable in the assessment year 1977-78, the previous year in respect of which ended on 31-3-1977 ?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in cancelling the order of the Commissioner, on the ground that it was without jurisdiction ?

The assessee, financial corporation, set up under the State Financial Corporations Act, filed returns for the assessment year 1978-79 ending on 31-1-1977 accounting year 1977-78. u/s 143(3), the Income Tax Officer, A Ward, Shimla, passed the assessment order (Annexure ''A''), assessing the income to be Rs. 12,57,274 on the basis of the return filed by the assessee declaring the income as Rs. 12,47,644.

Exercising his powers u/s 263 of the Act, the Commissioner, Patiala, vide its order dated 30-10-1980 passed in Judl.-l/RO/19/1978-79 (Annexure ''B''),set aside the aforesaid assessment and remanded the matter back to the assessing officer to reassess the income. The Commissioner set aside the assessment after disallowance of Rs. 10,050 being the discount on issue of bonds, which according to him, was a liability that arose in the year other than the previous year relevant to the assessment year 1977-78 and issued direction that the amount towards interest accrued on sticky loans be considered afresh for the purpose of assessment taking into consideration the evidence, which may be put by the assessee before the assessing officer.

Aggrieved by the same, the assessee filed an appeal (ITA No. 795/Chd/1980) before the Tribunal and relying upon its decision rendered with respect to another assessee, namely, Punjab Financial Corporation in ITA No. 144/Chd/1979 (assessment year 1972-73), the Tribunal set aside the order dated 30-10-1980 passed by the Commissioner in terms of its order dated 23-2-1982 (Annexure ''C''). The order passed by the Commissioner was held to be without jurisdiction, hence the reference in question was made to this Court.

Learned Counsel appearing for the parties, during the course of hearing, have candidly admitted that while passing the assessment order the Income Tax Officer did not take into consideration Circular No. 41(V-6)D of 1952 dated 6-10-1952. The learned Counsel for the parties are also in agreement that at the relevant point of time, it was this circular, which had to be considered for carrying out the assessment. Learned Counsel for the parties are also in agreement that the decision rendered by this Court in IT Ref. No. 23 of 1995, H.P. Financial Corporation v. CIT, decided on 9-4-2008, (reported at (2008) 6 DTR 276''Ed.), to the effect that the assessing officer was duty bound to carry out the assessment in accordance with the prevalent circular, which squarely applies to the facts of the present case also.

The assessment order in question is totally silent as to on what basis deduction of Rs. 94,875 towards interest was allowed and why the sum of Rs. 93,383 was not liable to be brought to tax by the Income Tax Officer.

The Commissioner in exercise of its powers u/s 263 of the Act has set aside the assessment order with a direction that the assessment be redone on the basis of material, which may be placed on record by the assessee to establish that if any of the debts has become bad or interest was not recoverable on any account.

While arriving at its conclusion in ITA No. 144 of 1997 pertaining to a different assessment year of another assessee the Tribunal was satisfied that there was sufficient material to arrive at a conclusion that the interest on sticky loans was not taxable. For the purpose of ready reference the findings are reproduced as under:

Even on merits, the Income Tax Officer had considered in the assessment made de novo on 31-12-1976 that in fact ''the Corporation''s method is that in cases in which 5 or more half yearly consecutive instalments of principal amounts fall due, the interest accruing from them from the year should not be credited to the interest received account but is taken to the suspense account. This method has been consistently adopted even in the subsequent years''. Thus the assessee Corporation was covered by the letter issued by the CBDT which was specifically directed by the Appellate Assistant Commissioner to be considered by the Income Tax Officer along with the facts on record of the assessee. The Income Tax Officer complied with the directions but took the precaution while allowing the deduction of interest of Rs. 1,03,286 to note that when this interest is received by the Corporation, it will be brought to tax u/s 41(1) of the Income Tax Act, 1961. The order of the Income Tax Officer was, therefore, made after exercising due care and caution and after judicial discretion that vested in him. This order on the date of it was correct on facts and in law applicable thereto. Such judicial discretion exercised by the Income Tax Officer cannot be said to be resulting into an order which is erroneous and prejudicial to the interest of revenue. We find that the Income Tax Officer could not have disregarded the letter of the CBDT as on the same issue there was no reason for him to give different treatment to the assessee Corporation.

Though the assessee was following mercantile method of accounting, yet in respect of the interest on sticky loans, an exception was made on proper rules observed uniformity in respect of loans where there was default in payment of 5 consecutive half yearly instalments. This was found by the Income Tax Officer himself as a fact in his order which the Commissioner thought to be erroneous, Thus method followed by the assessee is permissible and was also not in contradiction with the advice given by the apex body of the Income Tax department. As such the order of the Income Tax Officer on merits was neither erroneous nor prejudicial to the interest of revenue. It could not be cancelled by the Commissioner u/s 263 of the Act. His order is, therefore, bad in law on this account as well. It is, therefore, cancelled on each of the above accounts.

In its order dated 30-10-1980, the Commissioner has observed as under:

The assessment in the case of M/ s Himachal Pradesh Financial Corporation Ltd., was framed on a total income of Rs. 12,57,274. The Income Tax Officer computed this income in spite of the auditor''s note that interest on sticky accounts for the year amounting to Rs. 93,383 has not been provided for and after allowing a sum of Rs. 10,050 being liability discount on issue of bonds incurred in earlier years. The balance sheet showed that the opening balance of Rs. 1,54,074 in the interest in suspense account had only been reduced by a sum of Rs. 39,306. The balance carried forward thus worked out to Rs. 1,14,768. The assessee did not claim any amount as a bad debt nor did it claim that in view of there being no scope of recovery, interest had not been charged in certain accounts. Actually, the assessee did not furnish any details of these loans nor did the Income Tax Officer go into the claim of the assessee that the amount of Rs. 93,383 being interest accrued on various loans was not to be taxed as income of the assessee on accrual basis. The records showed that the accounting method of the assessee was mercantile and thus the sum of Rs. 93,383 should have been returned as taxable income and should have been brought to tax by the Income Tax Officer.

Since there was no material on record either before the assessing officer or before the Tribunal, the Tribunal was not right in law in allowing the assessee''s claim regarding interest due on sticky loans. The reliance on the decision in relation to another assessee was misconceived, being on separate set of facts. The Commissioner has power to exercise jurisdiction, if the order of the Income Tax Officer is erroneous and prejudicial to the interest of the revenue. An incorrect assumption of fact or an incorrect application of law would satisfy the requirement of the order being erroneous. The expression "prejudicial to the interest of revenue" as understood in its ordinary meaning is of wide import and not confined to the loss of tax alone. If due to an erroneous order of the assessing officer, the revenue is losing tax lawfully payable by a person, it should be certainly prejudicial to the interest of the revenue (Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 , Rampyari Devi Saraogi Vs. Commissioner of Income Tax, West Bengal and Others, and Smt. Tara Devi Aggarwal Vs. Commissioner of Income Tax, West Bengal, Calcutta,

While setting aside the assessment order, the Commissioner noted that the Income Tax Officer passed the order without any material on record. Admittedly, the circular dated 6-10- 1952 has also not been considered by the assessing officer. In our view, the assessing officer failed to apply its mind in its correct perspective and the order passed by him is erroneous. There is no material on record to support the decision arrived at by the Tribunal. In this background, the Tribunal, therefore, was wrong in arriving at its conclusion that the Commissioner had exceeded its jurisdiction while setting aside the same. The Commissioner rightly exercised his power u/s 263(1) of the Act.

Questions of law Nos. 1 and 3 are answering accordingly.

Question No. 2, as has been submitted by the learned Counsel for the parties, is squarely covered by a decision rendered by this Court in Himachal Pradesh Financial Corporation Ltd. Vs. Commissioner of Income Tax, While considering whether the assessee is entitled to claim discount on bonds and debentures as allowable expenditure, this Court has held:

Therefore, our answer to question No. 2 is that though the entire amount of discount amounting to Rs. 94,875 was not an allowable expenditure in the assessment year in question, the said amount of discount has to be spread out proportionately over the number of years for which the bonds are issued and the proportionate amount of discount would be allowable expenditure in the assessment year in question.

We find that the reasoning of the Madhya Pradesh High Court is in accordance with law and we prefer to follow that reasoning and hold that it is not necessary for the assessee to make out a case of actual expenditure before claiming allowable deduction under the provisions of Section 3.7 of the Act. In such circumstances, we answer the question referred to us in the negative and hold that the Tribunal was not justified in holding that the discount of bonds was not allowable expenditure.

Question No. 2 is answered accordingly as admittedly having been covered by the aforesaid decision.

Accordingly, we answer the questions referred to us. The matter is remanded back to the assessing officer to frame fresh assessment order in view of our aforesaid observations.