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Judgment
The following substantial questions of law arise for our consideration.
Whether the Tribunal was justified in law in holding that the order passed by the Commissioner is valid and within the powers u/s 263 of the Act on the facts and circumstances of the case?
Whether the Tribunal is justified in holding that the proviso to Section 14A of the Income Tax Act does not apply to the revisionary powers tinder Section 263 of the Income Tax Act?
Whether the Tribunal failed to appreciate that the proviso does not empower the Commissioner to assume jurisdiction u/s 263 of the Income Tax Act in respect of the assessment years prior to 2001-02?
These appeals are filed by the Appellants-Assessees challenging the orders of the Income Tax Appellate Tribunal by common order dt. 19.9.2008.
The admitted facts are, the Appellants-Assessees are partners of the partnership firm run under the name and style of M/s. Karnataka Agro Chemicals. Apart from the assessment of partnership firm, the Appellants were also assessed to tax in their individual capacity on the returns filed by them.
The returns of the Appellants-Assessees came to be selected for scrutiny for the assessment year 1995-96. Accordingly, the Notice u/s 143(2) of the Act came to be issued and the assessing officer passed orders of assessment by allowing the Assessees''s claim and set off the interest against other taxable income and concluded the same. However, the order of the assessment officer came to be selected for the review u/s 263 of the Act by the Commissioner of Income Tax Karnataka-I on the ground that the assessment was prejudicial to the interest of the revenue. On 29.12.99 orders came to be passed by the Commissioner of Income Tax who directed the assessing officer to disallow the interest paid en borrowed capital invested in the partnership firm and also directed the assessing authority to ascertain the actual amount of borrowed funds which were invested by the Appellants in partnership firm.
Aggrieved by the same, the appeal came to be filed before the Income Tax Appellate Tribunal. On 24.5.2004 the Tribunal dismissed the appeal of the Appellants, holding that the Commissioner of Income Tax had with him the jurisdiction to review the order of the assessing officer.
Aggrieved by the same, appeal came to be preferred before the High Court of Karnataka and the High Court of Karnataka vide its order dt.24.1.2008 in ITA. 584-587/2004 formed questions of law and expressed that the Tribunal had to consider the effect of proviso to Section 14A of the Income Tax Act while considering the case of the Assessees and with these observations, remitted the matter back to the Tribunal. Accordingly, the Tribunal pursuant to the order of the High Court made fresh orders on 19.9.2008 and reaffirmed its earlier findings. Aggrieved by the same, the Appellants-Assessees are before us.
According to the Appellants-Assessees, the Tribunal again failed to hold the impact of proviso to Section 14A of the Act which clearly indicates non-application of the said proviso to Section 14A for any assessment year prior to 2001-02, According to the Appellants'' counsel the language of the proviso is very clear and unambiguous, therefore, the Tribunal failed to appreciate that nothing can empower the assessing officer to pass an order enhancing assessment or reducing the refund already made and the action of the CIT passing an order u/s 263 was not justified. He further contends that the Commissioner of Income Tax can act u/s 263 of the Act only when the order passed by the assessing officer is erroneous and prejudicial to the interest of the revenue. In the absence of any error in the order of assessment by the assessing officer by allowing the interest expenditure rightly, there was no justification for the Commissioner to invoke his powers u/s 263 by reviewing the orders of assessing officer. When the view expressed by the assessing officer was also possible view, there was no jurisdiction for the Commissioner to interfere and exercise the powers u/s 263 of the Act. With these averments, placing reliance in the case of MALABAR INDUSTRIAL CO. LTD. Vs. COMMISSIONER OF INCOME TAX, , in the case of Commissioner of Income Tax, Madras Vs. Indian Bank Ltd., , in the case of Commissioner of Income Tax Vs. Sridev Enterprises, , sought for setting aside the orders of the Tribunal dt. 19.9.2008.
As against this, the contention of the revenue is that by virtue of proviso to Section 14A assessments cannot be re-opened. It was contended, Indian Bank case deals with exempted income and Rajendra Prasad Moody''s case deals with income from other sources, therefore, none of the decisions referred to by the learned Counsels for the Appellants applies to the facts of the case and the Commissioner was justified in holding that Appellantss-Assessees were not entitled for the deductions from taxable income towards the expenditure which was incurred for investment from a non-taxable source of income.
Section 14A of the Income Tax Act reads as under:
1) For the purposes of computing the total income under this Chapter, Assessees, no deduction shall be allowed in respect of expenditure incurred by the Assessees in relation to income which does not form part of the total income under this act.
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess u/s 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise Increasing the liability of the Assessees u/s 154, for any assessment year beginning on or before the 1st day of April 2001.
Through the Finance Act of 2001 a new Section 14A of the Act was inserted in the Income Tax Act retrospectively with effect from 1.4.1962 to clarify the intention of the Legislature that no deductions would be allowed in respect of any expenditure incurred by the Assessees in relation to income which does not form part of total income under the Income Tax Act.
The intention of inserting new section retrospectively was to set the existing controversy on this issue at rest and not to unsettle the cases by raising the issue afresh. It was proposed to insert a proviso to Section 14A so as to clarify that the assessing officer would not reassess the case u/s 147 or pass an order enhancing assessment or reduce a refund already made or otherwise increase the liability of the Assessees u/s 154 for any assessment year beginning on or before 1.4.2001.
In the case of CIT, Madras, v. Indian Bank Limited, the question was whether expenditure or allowance must be necessarily capable of producing taxable income. It was held there is nothing in the language of Section 10 of Income Tax Act from which it cannot be fairly implied that an expenditure or allowance falling within the section must fulfill some other condition before it can be allowed. The Respondent-bank-Assessees in the course of its business had invested large sums in securities including securities the interest on which was exempt from tax, profits and losses on the purchase and sale of such securities were duly taken into account while computing the business income of the Assessees. It was held that the interest paid by the Respondent-Assessees on monies borrowed from its various depositors had to be allowed in its entirety u/s 10(2)(iii) of the Indian Income Tax Act of 1922 and there was no warrant for disallowing a proportionate part of the interest referable to monies borrowed for the purchase of securities whose interest was tax-free.
So far as CIT v. Rajendra Prasad Moody''s case, it was a case where the Assessees borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year, but did not receive any dividend on the shares purchased with those monies. It was held that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as deductions u/s 57(3) of the Income Tax Act in computing its income from dividend under the head "Income from other sources".
In the case of CIT v. Sridev Enterprises, Assessees advanced certain amounts free of interest to another firm having common partners. He had also paid interest on monies borrowed by the Assessees. The Assessees claim for deduction for payment of such interest for the past years in the previous assessment came to be allowed on the assumption that those advances were not out of borrowed funds.
In the present case, in the first instance by order dt.24.5.2904 the Tribunal held that after the proviso was inserted to Section 14A, no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of total income. It further held that if there is a direct nexus between the borrowal of amount and investment in the firm and if the Assessees is receiving only share of profit which can be exempted u/s 10(2-A), such interest paid on the amount borrowed is not allowable as deduction. Therefore, the Tribunal held CIT was justified in revising such an order of the assessing officer who gave the deduction of interest paid on borrowal for investment in firm. Partly upholding the direction of CIT as the CIT did not give specific finding that the entire amount had been invested in the partnership firm restored the matter to the assessing officer to compute the interest payable on such sum which has been invested in the partnership firm and disallowed only those portions which can be attributed towards investment in the partnership firm. They further held that after insertion of Section 14A of the Act decision in Indian Bank case will not be applicable. They also referred to Rajendra Moody''s case and on facts held the said case was not applicable to the present case. This came to be questioned before the High Court and the High Court by its earlier order dated 24.1.2008 remitted back the matter to the Tribunal to consider the case of the assess so far it relates to computation of expenditure u/s 14A of the Act.
Subsequent to the remand, the Tribunal after hearing parties held that order of the CIT u/s 263 is dt. 29.12.99 and proviso to the Section 14A was inserted with retrospective effect from 11.5.2001. Therefore, said proviso does not apply to the facts of the Assessees. So far as on facts of the present case are concerned, the assessment year is 1995-96. Order u/s 263 is dt. 29.12.1999. Though Section 14A came to be inserted by Finance Act of 2001 with effect from 1.4.1962 proviso came to be inserted by finance act of 2002 with retrospective effect from 11.5.2001. Therefore, as on the date of orders of CIT u/s 263 proviso to Section 14A was not even in existence. Therefore, the Tribunal was justified in saying proviso to Section 14A does not apply to the facts of the Assessees case.
As far as the contentions of the Assessees on facts are concerned, the Tribunal is the final fact finding authority. It observed that in the earlier round of litigation also the Assessees has included the claim of deduction of interest against incomes credited to the profit and loss account without satisfying the interest allocated to the capital contributed in the partnership firm on which whole of the interest has been allowed and the claim was considered u/s 263 by the CIT.
As a matter of fact, the Assessees submitted before the Tribunal that the interest paid is legitimate business expenses against the income even though not taxed in the hands of the Assessees''s has nevertheless been taxed in the hands of the firm wherein the Assessees are partners. Unless there is material to establish the amount being utilised for investment in the firm, there cannot be computation regarding the allowability of the interest paid. The question is whether such material was available. The fact finding authorities have opined that such material wets net available in the paper books submitted before the Tribunal at the time of hearing. Therefore, the Tribunal was justified in saying that the Assessees himself was not clear about the amount, which could be allocated to the interest paid on the capital by virtue of partnership deed as entered into between the partners and M/s Karnataka Agro Chemicals was an additional capital entitled for interest to be considered as investment on the borrowed funds on which the Assessees has claimed interest as business expenditure. Section 14A deals with the expenditure incurred in relation to income not includable in total income. However, the proviso has come into existence only with effect from 11.5.2001 but Section 14A was brought in by Finance Act of 2001 with retrospective effect 1.4.62. In that view of the matter, the Income Tax Commissioner while exercising powers u/s 263 of the Act was justified in saying the expenditure attributed to taxable income is allowable and what is attributable to non-taxable income cannot be allowed as deduction. The CIT was right in directing the assessing officer to compute the interest, which could not be allowed as against the exempted income being a share in the profit on the capital investment by the individual partners. Even after remand by the High Court, the Appellants-Assessees were not able to bring, on record the facts clarifying the position. Therefore, the Tribunal was justified in saying that the facts have to be clarified before the assessing officer while proceeding with the matter as directed by CIT.
In view of the discussion and reasoning above, we are of the opinion none of the cases relied upon by the learned Counsel for the Appellants applies to the facts of the present case and the Tribunal has appreciated the case on hand in accordance with the provisions of Section 14A including the proviso to Section 14A of the Act. Accordingly, the substantial questions of law are answered in favour of the revenue. Accordingly, the appeal is dismissed.