Commissioner Of Income-Tax Chennai v. M/S.pathy Cine Enterprises

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 26.10.2006 Coram The Honourable Mr.Justice P.D.DINAKARAN and The Honourable Mr.Justice P.P.S.JANARTHANA RAJA T.C.(A) No.2446 of 2006 Commissioner of Income-TaxChennai. ...Appellant Vs. M/s.Pathy Cine EnterprisesNo.133, Kodambakkam High RoadChennai-34. ...Respondent PRAYER: Appeal under Section 260A of the Income-Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras ‘B’ Bench,dated 17.3.2006 made in I.T.A. No.1249/Mds/2004 for the assessmentyear 2000-01.(C.No.3033/41-42/III/2003-04 dated 5.3.2004 on the fileof the Commissioner of Income-Tax, Chennai-III, Chennai -34 againstPAN AACCP 4182F on the file of the Income-Tax Officer, Company Ward V(i), Chennai). In this appeal directed against the order dated 17.3.2006 of theTribunal made in ITA No.1249/Mds/2004, the following questions wereformulated as substantial questions of law arising for consideration: (i)Whether in the facts and circumstances of the case, theTribunal was right in holding that income from hiring of airconditioners to its directors as "income from business" ? andTribunal was right in holding that income from hiring of airconditioners to its directors as "income from business" ? and(ii)Whether in the facts and circumstances of the case, theTribunal was right in holding that the exercise of powerunder Section 263 of the Income Tax Act by the Commissionerof Income Tax was erroneous ?"Tribunal was right in holding that the exercise of powerunder Section 263 of the Income Tax Act by the Commissionerof Income Tax was erroneous ?" https://hcservices.ecourts.gov.in/hcservices/ 2.1. To learn as to how these questions arose, we may refer,in brief, to the facts of the case: The relevant assessment year is 2000-2001. The assesseeadmitted the lease rent received from M/s.Blue Star Ltd., as "incomefrom house property" after allowing the statutory deductions. Theassessee also admitted "net loss" of Rs.5,75,580/- as "income frombusiness" derived from the business of hiring of air conditioners.The Assessing Officer accepted the income as shown in the return. 2.2. Alleging under assessment of income by the assessee, theCommissioner of Income Tax issued a notice dated 8.1.2004 underSection 263 of the Income Tax Act (for brevity, "the Act"), to showcause as to why the order of assessment should not be revised,thereby proposing to treat the income derived from the hiring of airconditioners to the marriage halls belonging to the Directors of theassessee/company as "income from other sources". 2.3. In response to the said show cause notice, the assesseesubmitted that the only business of the assessee from its inceptionsince two decades was leasing of air conditioners and the lease wasinitially made to M/s.Blue Star, Chennai and M/s.Syndicate Bank,Chennai and after expiry of the lease to these two concerns, theassessee/ company leased out the air conditioners for use in themarriage hall owned by one of Directors and therefore, there was acontinuous business activity of leasing of machinery during theprevious year ending 31.3.2000 and consequently, the expendituredebited to the income and expenditure account were actually incurredwholly and exclusively for the conduct of the business. 2.4. The Commissioner, however, in his order dated 5.3.2004,held that the assessee never had carried on any organised andsystematic activity of the business of hiring of air conditionersand refused to grant the statutory allowance under the head "incomefrom house property" and held that the expenses claimed have nonexus with rental income from hiring of air conditioners andaccordingly, treated the income from hiring of air conditioners as"income from other sources". 2.4. The Commissioner, however, in his order dated 5.3.2004,held that the assessee never had carried on any organised andsystematic activity of the business of hiring of air conditionersand refused to grant the statutory allowance under the head "incomefrom house property" and held that the expenses claimed have nonexus with rental income from hiring of air conditioners andaccordingly, treated the income from hiring of air conditioners as"income from other sources". 2.5. On appeal by the assessee, the Tribunal, appreciating theexplanation offered by the assessee, that the assessee/company waspursuing the business as per the main object clause of itsmemorandum of association and that the assessee has been doing thesame line of business and submitting its returns consistently on thesame basis for nearly two decades, came to the conclusion that theonly difference which arose is that earlier the air conditionerswere hired to other parties and during the impugned assessment year,the assessee had hired the air conditioners to marriage hall run byone of its Directors and as a consequence, set aside the revision order under Section 263 of the Act. Hence, the above appeal raisingthe substantial questions of law referred to above. 3. Since the second question of law raised forms the basis fordeciding the issues in this appeal, we propose to deal with both thequestions jointly. 4. It is apt to refer Section 263 of the Income Tax Act, whichprovides a revision jurisdiction to the Commissioner to revise theorders prejudicial to the Revenue. Section 263 of the Income Tax Actreads as under: "Section:263. Revision of orders prejudicial to revenue.- (1) The Commissioner may call for and examine the record ofany proceeding under this Act, and if he considers that anyorder passed therein by the Assessing Officer is erroneous inso far as it is prejudicial to the interests of the revenue,he may, after giving the assessee an opportunity of beingheard and after making or causing to be made such inquiry ashe deems necessary, pass such order thereon as thecircumstances of the case justify, including an orderenhancing or modifying the assessment, or cancelling theassessment and directing a fresh assessment. Explanation.-For the removal of doubts, it is hereby declaredthat, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day ofJune, 1988, by the Assessing Officer shall include-- (i) an order of assessment made by the AssistantCommissioner or Deputy Commissioner or the Income-tax Officeron the basis of the directions issued by the JointCommissioner under section 144A; (ii) an order made by the Joint Commissioner inexercise of the powers or in the performance of the functionsof an Assessing Officer conferred on, or assigned to himunder the orders or directions issued by the Board or by theChief Commissioner or Director General or Commissionerauthorised by the Board in this behalf under section 120 ; (b) "record" shall include and shall be deemed always tohave included all records relating to any proceeding underthis Act available at the time of examination by theCommissioner ; (c) where any order referred to in this sub-section and https://hcservices.ecourts.gov.in/hcservices/ passed by the Assessing Officer had been the subject matterof any appeal, filed on or before or after the 1st day ofJune, 1988 the powers of the Commissioner under this sub-section shall extend and shall be deemed always to haveextended to such matters as had not been considered anddecided in such appeal. (2) No order shall be made under sub-section (1) after theexpiry of two years from the end of the financial year inwhich the order sought to be revised was passed. (b) "record" shall include and shall be deemed always tohave included all records relating to any proceeding underthis Act available at the time of examination by theCommissioner ; (c) where any order referred to in this sub-section and https://hcservices.ecourts.gov.in/hcservices/ passed by the Assessing Officer had been the subject matterof any appeal, filed on or before or after the 1st day ofJune, 1988 the powers of the Commissioner under this sub-section shall extend and shall be deemed always to haveextended to such matters as had not been considered anddecided in such appeal. (2) No order shall be made under sub-section (1) after theexpiry of two years from the end of the financial year inwhich the order sought to be revised was passed. (3) Notwithstanding anything contained in sub-section (2), anorder in revision under this section may be passed at anytime in the case of an order which has been passed inconsequence of, or to give effect to, any finding ordirection contained in an order of the Appellate Tribunal,National Tax Tribunal, the High Court or the Supreme Court. Explanation.-In computing the period of limitation for thepurposes of sub-section (2), the time taken in giving anopportunity to the assessee to be re-heard under the provisoto section 129 and any period during which any proceedingunder this section is stayed by an order or injunction of anycourt shall be excluded." (emphasis supplied) 5. The Apex Court in Malabar Industrial Co. Ltd., v.Commissioner of Income Tax, [2000] 243 ITR 83 considered the scopeof the revisionary jurisdiction of the Commissioner of Income Taxunder Section 263 Act for revising the orders prejudicial to therevenue and held as under: "A bare reading of this provision makes it clear that theprerequisite to the exercise of jurisdiction by theCommissioner suo motu under it, is that the order of theIncome-tax Officer is erroneous in so far as it isprejudicial to the interests of the Revenue. The Commissionerhas to be satisfied of twin conditions, namely, (i) the orderof the Assessing Officer sought to be revised is erroneous ;and (ii) it is prejudicial to the interests of the Revenue.If one of them is absent—if the order of the Income-taxOfficer is erroneous but is not prejudicial to the Revenue orif it is not erroneous but is prejudicial to the Revenue—recourse cannot be had to section 263(1) of the Act. There can be no doubt that the provision cannot be invoked tocorrect each and every type of mistake or error committed bythe Assessing Officer, it is only when an order is erroneousthat the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy therequirement of the order being erroneous. In the samecategory fall orders passed without applying the principlesof natural justice or without application of mind. The phrase “prejudicial to the interests of the Revenue” isnot an expression of art and is not defined in the Act.Understood in its ordinary meaning it is of wide import andis not confined to loss of tax. The High Court of Calcutta inDawjee Dadabhoy and Co. v. S. P. Jain [1957] 31 ITR 872, theHigh Court of Karnataka in CIT v. T. Narayana Pai [1975] 98ITR 422, the High Court of Bombay in CIT v. Gabriel IndiaLtd [1993] 203 ITR 108 and the High Court of Gujarat in CITv. Smt. Minalben S. Parikh [1995] 215 ITR 81 treated loss oftax as prejudicial to the interests of the Revenue.... The phrase “prejudicial to the interests of the Revenue” isnot an expression of art and is not defined in the Act.Understood in its ordinary meaning it is of wide import andis not confined to loss of tax. The High Court of Calcutta inDawjee Dadabhoy and Co. v. S. P. Jain [1957] 31 ITR 872, theHigh Court of Karnataka in CIT v. T. Narayana Pai [1975] 98ITR 422, the High Court of Bombay in CIT v. Gabriel IndiaLtd [1993] 203 ITR 108 and the High Court of Gujarat in CITv. Smt. Minalben S. Parikh [1995] 215 ITR 81 treated loss oftax as prejudicial to the interests of the Revenue.... The phrase “prejudicial to the interests of the Revenue” hasto be read in conjunction with an erroneous order passed bythe Assessing Officer. Every loss of revenue as a consequenceof an order of the Assessing Officer cannot be treated asprejudicial to the interests of the Revenue. For example,when an Income-tax Officer adopted one of the coursespermissible in law and it has resulted in loss of Revenue ;or where two views are possible and the Income-tax Officerhas taken one view with which the Commissioner does notagree, it cannot be treated as an erroneous order prejudicialto the interests of the Revenue, unless the view taken by theIncome-tax Officer is unsustainable in law. It has been heldby this court that where a sum not earned by a person isassessed as income in his hands on his so offering, the orderpassed by the Assessing Officer accepting the same as suchwill be erroneous and prejudicial to the interests of theRevenue. Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC)and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC)." (emphasis supplied) 6. After referring to the facts and the law enunciated in thedecision referred supra, it is clear that what was not prejudicialto the revenue for two decades cannot be construed as prejudicial tothe revenue for the impugned assessment year, merely because thelessee happens to be one of the Directors of the assessee/company,as it is well settled that the phrase "prejudicial to revenue" mustbe read in conjunction with an erroneous order. In any event, whenthere are sufficient materials to support the claim of the assesseeto treat the income derived from the hiring of air conditioners asbusiness income for over two decades, the Commissioner has noauthority to invoke the revisionary jurisdiction under Section 263of the Act, merely on surmise that the order of the assessing officer is erroneous or the order is prejudicial to the revenue, onthe ground of change of the lessee. Hence, in our consideredopinion, the Tribunal had rightly held that the Commissioner haderroneously exercised the power under Section 263 of the Act. 7. That apart, it is well settled in law vide Smt.Kavit Sanghiv. CIT,[1982] 133 ITR 48 that, in the absence of any material toshow that the air conditioning plant was not acquired by theassessee as a commercial asset and was acquired for any otherpurpose by the assessee, the income derived from the hiring of theair-conditioning plant was chargeable as profits and gains frombusiness and not as income from other sources. 8. In the instant case, as referred to in the order of theTribunal, the object clause of the Memorandum of Association of theassessee/Company specifies the object of the company is to carry onthe business of running cinema house and lease out the climatecontrol device and other machineries and as the assessee could notget the no objection certificate for running the cinema house, itwas carrying on the business by regularly leasing out the airconditioners. Merely because of the change in the parties to whomthe air conditioners were leased, in our considered opinion, wouldnot be a conclusive premise to change the assessment of the samefrom the head "business income" to "income from other sources". For the reasons aforesaid, finding no substantial question oflaw arises, this appeal is dismissed. For the reasons aforesaid, finding no substantial question oflaw arises, this appeal is dismissed. Sd/Asst.Registrar/true copy/ Sub Asst.Registrar sasi To: 1. The Assistant Registrar, Income-tax Appellate Tribunal, Rajaji Bhavan, Besant Nagar, Chennai 600 090 2. The Commissioner of Income-tax Chennai-III, Chennai. 3. The Commissioner of Income Tax,Chennai. 4.The Income Tax Officer,Company Ward V(i), Chennai. +1cc to Mrs.Pushya Sitaraman,Advocate Sr 50139JRG (CO)km/29.11. T.C.(A) No.2446 of 2006