Ita/587/2009 Of The Commissioner Of Income Tax,Trichur v. Shri.paul John,Delicious Cashew Co

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN THURSDAY, THE 14TH JANUARY 2010 / 24TH POUSHA 1931 ITA.No. 587 of 2009() --------------------- ITA.318/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT: (S): RESPONDENT: ------------------------------- THE COMMISSIONER OF INCOME TAX, TRICHUR. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT: ------------------------- SHRI.PAUL JOHN, DELICIOUS CASHEW CO. IRINJALAKUDA. ADV. SRI.JOSEPH KODIANTHARA SRI.TERRY V.JAMES THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 14/01/2010 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C .N. RAMACHANDRAN NAIR &V.K. MOHANAN, JJ. -------------------------------------------- -------------------------------------------- Dated this the 14th day of January, 2010 JUDGMENT Ramachandran Nair, J. The question raised in the appeal filed by the Revenue is whetherthe Tribunal was justified in cancelling the order issued by theCommissioner of Income tax under Section 263 of the I.T. Actdirecting the assessing officer to disallow and bring to tax expenditurewrongly claimed by the assessee and allowed in the original assessmentas a deduction which is otherwise not allowable by virtue of theexpress provision contained in Section 14A of the I.T. Act. Thededuction claimed by the assessee is interest paid on borrowed fundsfor investment in a partnership firm where-from the assessee as partnergot share income which is exempt from tax under Section 10(2) of theI.T. Act. Admittedly the claim of deduction made by the assessee andallowed by the officer is expressly prohibited by Section 10A whichprohibits grant of deduction of any expenditure incurred by the assessee in relation to any income which does not form part of the totalincome computed under the Act. Since the claim of deduction waswrongly allowed, the order happened to be prejudicial to the interest ofthe revenue and therefore the Commissioner in exercise of power underSection 263 of the Act set aside the assessment with direction to theassessing officer to revise the assessment for the purpose ofwithdrawing deduction wrongly given and for levying tax thereon.When the assessee challenged order of the Commissioner in appealbefore the Tribunal, the Tribunal held that that in view of theprohibition contained in the proviso to Section 14A prohibiting theassessing officer from reopening past assessment for the purpose ofdisallowing the expenditure wrongly allowed, the Commissioner isalso bound by the said prohibition and so much so the order issuedunder Section 263 by the Commissioner is illegal and unsustainable. Itis against this order of the Tribunal that the revenue has filed thisappeal. We have heard standing counsel appearing for the appellant-revenue and senior counsel Sri. Joseph Markose appearing for therespondent-assessee. 2. Section 14A introduced by Finance Act 2001 with 14A. For the purpose of computing the total income underthis Chapter, no deduction shall be allowed in respect ofexpenditure incurred by the assessee in relation to incomewhich does not form part of the total income under this Act. Provided that nothing contained in this section shallempower the assessing officer either to reassess underSection 147 or pass an order enhancing the assessment orreducing a refund already made or otherwise increasing theliability of the assessee under section 154, for anyassessment year beginning on or before the 1st day ofApril, 2001. 2. Section 14A introduced by Finance Act 2001 with 14A. For the purpose of computing the total income underthis Chapter, no deduction shall be allowed in respect ofexpenditure incurred by the assessee in relation to incomewhich does not form part of the total income under this Act. Provided that nothing contained in this section shallempower the assessing officer either to reassess underSection 147 or pass an order enhancing the assessment orreducing a refund already made or otherwise increasing theliability of the assessee under section 154, for anyassessment year beginning on or before the 1st day ofApril, 2001. It is clear from the above proviso that even though the scheme ofdisallowance of expenditure incurred by the assessee in relation toincome exempted under the Act is introduced with retrospective effectfrom 1.4.1962, Parliament has chosen to implement the provision onlyfrom the assessment year 2001-02 because express prohibition isintroduced in the proviso against assessing officers reopening orrectifying assessments under Section 147 or under Section 154 forwithdrawing deduction allowed in assessments concluded for periodsprior to 1.4.2001. The contention of the standing counsel is thatprohibition introduced in the proviso is only against assessing officers from exercising their powers under Sections 147 and 154 of the Actand since there is no restriction against Commissioner's power underSection 263 he is free to invoke the same and disallow it, consistentwith the express provision contained in Section 14A, within the periodof limitation provided therein. Senior counsel appearing for therespondent-assessee on the other hand contended that the prohibition inthe proviso is against reopening of concluded assessments for periodsprior to 1.4.2001 and even though Commissioner's authority underSection 263 is not expressly provided therein, the bar under the provisoapplies to him as well. We are of the view that the proviso to Section14A is intended to provide finality for concluded assessments wheredeductions for earning exempted income would have been allowedand therefore unless the proviso applies to Commissioner of Incometax as well, the purpose of the proviso will be defeated. Further, in ourview, the bar against the assessing officer passing an order enhancingthe assessment stated in the proviso takes in an order which the Officermay have to pass pursuant to the direction issued by the Commissionerunder Section 263. Even though standing counsel submitted that theproviso is applicable only to proceedings that can be issued by the assessing officer under Sections 147 and 154, we feel besides thepowers of the Officer under Sections 147 & 154, the assessing officerhas the authority to increase the liability of the assessee pursuant toorders issued under Section 263 by the Commissioner and pursuant toorders of enhancement which the Commissioner of Income tax(Appeals) can issue under Section 251 (1)(a) while deciding the appealfiled by the assessee. We therefore hold that the proviso to Section14A prohibits all situations where the Officer is otherwise entitled orrequired to revise an assessment which includes orders issued by theCommissioner under Section 263 or order of enhancement issued bythe CIT (Appeals) in exercise of his power above referred. Consequently the appeal filed by the revenue is dismissed. (C.N.RAMACHANDRAN NAIR) Judge. (V.K. MOHANAN) Judge. kk