Itxa1029_17.Doc v. Hence, Revenue Is In Appeal Before Us

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL (IT) NO.1029 OF 2017 Principal Commissioner of Income Tax-9Vs.Destimoney India Services Pvt. Ltd. …Appellant…Respondent Mr. Arvind Pinto for Appellant. Mr. R. Murlidhar a/w. Mr. Upendra Lokegaonkar i/b. Mint andConfreres for Respondent. CORAM : UJJAL BHUYAN,MILIND N. JADHAV, JJ.DATE :FEBRUARY 03, 2020 P.C.: Heard Mr. Pinto, learned standing counsel Revenue for theappellant and Mr. Murlidhar, learned counsel for the respondent -assessee. 2.This appeal under Section 260-A of the Income Tax Act, 1961(briefly 'the Act' hereinafter) has been preferred by the Revenue assailingthe order dated 28.10.2015 passed by the Income Tax AppellateTribunal, 'I' Bench, Mumbai ('Tribunal' for short) in I.T.A. No.3055/Mumbai/2015 for the assessment year 2011-12. 3.Following order of this Court dated 04.11.2019, appellant hasprojected the following revised question as substantial question of law: 'Whether on the facts and in the circumstances of the case wasthe Tribunal right in law in setting aside the order of the CITpassed under Section 263 of the Act holding that when theclaim of the assessee made for rectification has been justifiablyallowed by the assessing officer then the same cannot be treatedas a ground to invoke the provisions of Section 263 of the Act;overlooking the fact that the mistake rectified by the assessingofficer was not apparent from the record but was that of adebatable issue?" concluded by the assessing officer under Section 143(3) of the Act on29.03.2014 determining total taxable income of the respondent atRs.18,16,28,888.00. 5.Respondent thereafter filed application on 28.04.2014 forrectification of the assessment order under Section 154 of the Act. It wasmentioned that respondent had carried forward business loss as well asunabsorbed depreciation to be set-off against income for the assessmentyear 2011-12 as well as for future years. While computing the totaltaxable income during assessment proceedings, set-off of the saidbrought forward business loss and unabsorbed depreciation aggregatingto Rs.34,25,68,953.00 was not granted. In such circumstances,respondent sought for rectification of the assessment order by setting-offthe brought forward business loss and unabsorbed depreciation againstthe assessed income. Assessing officer in his order dated 06.06.2014accepted the above contention of the respondent by taking the view thatit was a mistake apparent from the record. Accordingly, the assessmentorder was rectified by setting-off the unabsorbed depreciation of earlieryears aggregating to Rs.18,16,28,888.00 to the extent of the assessedincome and thereafter the remaining unabsorbed amount to be carriedforward to the next year for the set-off. 6.The jurisdictional commissioner i.e., Commissioner of IncomeTax-6, Mumbai took the view that the subsequent claim made by therespondent was a debatable issue which required a hearing. It was not amistake which could be construed to be apparent from the record. Insuch circumstances, the Commissioner invoked jurisdiction underSection 263 of the Act by taking the view that the rectification order waserroneous in as much as it was prejudicial to the interest of the Revenueand by the order dated 26.08.2014, set aside the rectification orderpassed by the assessing officer with the direction that rectificationapplication of the respondent be disposed of by passing a fresh order inaccordance with law after giving a reasonable opportunity to the respondent. 6.The jurisdictional commissioner i.e., Commissioner of IncomeTax-6, Mumbai took the view that the subsequent claim made by therespondent was a debatable issue which required a hearing. It was not amistake which could be construed to be apparent from the record. Insuch circumstances, the Commissioner invoked jurisdiction underSection 263 of the Act by taking the view that the rectification order waserroneous in as much as it was prejudicial to the interest of the Revenueand by the order dated 26.08.2014, set aside the rectification orderpassed by the assessing officer with the direction that rectificationapplication of the respondent be disposed of by passing a fresh order inaccordance with law after giving a reasonable opportunity to the respondent. 7.This order was assailed by the respondent by filing appeal beforethe Tribunal. In the appellate proceedings, Tribunal noted that the issueregarding set-off of unabsorbed depreciation against the income of therespondent for the assessment year under consideration was covered bythe decision of the Supreme Court in CIT Vs. Virmani Industries Pvt.Ltd., (1995) 216 ITR 607 which view has been followed by several HighCourts as well as by the Tribunal. Therefore, by the appellate order dated28.10.2015, Tribunal held that when the claim of the respondent wasjustifiably allowed by the assessing officer then the same could not havebeen interfered with by the Commissioner by invoking the provisions ofSection 263 of the Act because the rectification order could not beconstrued to be erroneous and prejudicial to the interest of Revenue.Accordingly, Tribunal set aside the order passed by the Commissioner. 8.Hence, Revenue is in appeal before us. 9.Mr. Pinto has exclusively referred to the orders passed by thelower authorities particularly to the order passed by the Commissioner.He submits that the Commissioner had rightly held the issue to bedebatable. His further contention is that the Commissioner had done theright thing to remand the matter back to the assessing officer to re-hearthe rectification application after giving a reasonable opportunity to therespondent. Therefore, no prejudice was caused to the respondent by theorder passed by the Commissioner. He also submits that carried forwarddepreciation cannot be set-off against deemed income. 10.On the other hand, learned counsel for the respondent refers to theorder passed by the Supreme Court in Virmani Industries Pvt. Ltd.(supra) and submits that the issue in the rectification application issquarely covered by the aforesaid decision. Therefore, when theassessing officer had followed the decision of the Supreme Court and allowed the prayer for rectification by setting-off the carried forwardunabsorbed depreciation with the income of the respondent, the samecould not have been construed by the Commissioner to be an orderwhich is erroneous and prejudicial to the interest of the Revenue. In suchcircumstances, question of remanding the matter back to the assessingofficer for re-hearing of the matter does not arise. 11.Submissions made by learned counsel for the parties have beenconsidered. Also perused the materials on record. 12.After hearing learned counsel for the parties and on going throughthe materials on record, the issue involved in rectification proceedings isquite evident. By the order passed by the assessing officer under Section154 of the Act, he had allowed unabsorbed depreciation of earlier yearsto be set-off against the income of the respondent for the assessmentyear under consideration, further allowing unabsorbed depreciation andunabsorbed business loss to be carried forward to the next year for set-off. 11.Submissions made by learned counsel for the parties have beenconsidered. Also perused the materials on record. 12.After hearing learned counsel for the parties and on going throughthe materials on record, the issue involved in rectification proceedings isquite evident. By the order passed by the assessing officer under Section154 of the Act, he had allowed unabsorbed depreciation of earlier yearsto be set-off against the income of the respondent for the assessmentyear under consideration, further allowing unabsorbed depreciation andunabsorbed business loss to be carried forward to the next year for set-off. 13.In Virmani Industries Pvt. Ltd. (supra), Supreme Court wasconsidering the meaning and interpretation of sub-section (2) of Section32 of the Act which deals with carry forward of depreciation of thefollowing previous year and deemed to be part of that allowance and soon for the succeeding previous years. In the said case it was found thatfor the relevant assessment year, depreciation under Section 32(1)(ii)was more than the profits or gains of the assessee. Assessee claimed thatthe unabsorbed depreciation should be brought forward and set-offagainst profits of the new business. This claim of the assessee wasrejected by the income tax officer as well as by the commissioner on theground that such a set-off was permissible only where the businesscarried on in the subsequent assessment year was the same businesswhich was carried on in the earlier assessment year. However, Tribunaldisagreed with the said view and upheld the claim of the assessee. Thereafter, at the request of the revenue, Tribunal made reference to theHigh Court on the question as to whether unabsorbed depreciationshould be allowed to be set-off against the profits of new business by theassessee in the succeeding assessment year. In reference, the High Courtanswered the question in the affirmative i.e., in favour of the assesseeand against the revenue; whereafter the matter came up before theSupreme Court. 14.Supreme Court considered the meaning of the expression “profitsor gains chargeable” and held as under: Thereafter, at the request of the revenue, Tribunal made reference to theHigh Court on the question as to whether unabsorbed depreciationshould be allowed to be set-off against the profits of new business by theassessee in the succeeding assessment year. In reference, the High Courtanswered the question in the affirmative i.e., in favour of the assesseeand against the revenue; whereafter the matter came up before theSupreme Court. 14.Supreme Court considered the meaning of the expression “profitsor gains chargeable” and held as under: “We may first consider the meaning of the expression "profitsor gains chargeable". On first impression, the said expressionappears to refer only to profits or gains of business orprofession chargeable under Section 28. But this court hasrepeatedly held that the said expression is not so confined andthat it refers to income under all the heads of income specifiedin Section 14. In Jaipuria China Clay Mines (P) Limited, thefacts were these: the total income of the respondent - assesseefor the Assessment Year 1952-53 before charging depreciationwas Rs.14,041/-. After deducting depreciation of Rs.5,360/-,the Income Tax Officer computed the profit at Rs.8,681/-.Against this profit, he set off the losses of an earlier year.Having done this, the Income Tax Officer computed the incomeof the assessee from dividends at Rs.2,01,130/- and levied taxon it. The assessee claimed that the unabsorbed depreciationaggregating to Rs.76,857/- should be deducted from thedividend and if it is so done, the total income would getreduced to Rs.1,32,955/-. The Income Tax Officer rejected theclaim. When the matter was ultimately carried to this Court, ittook note of the opening words of sub-section, viz., "where, inthe assessment of the assessee or if the assessee is a registeredfirm, in the assessment of its partners, full effect cannot begiven to any such allowance....." and held on that basis that theexpression "profits or gains chargeable" in the said sub-sectionis not confined to profits and gains from business or professionbut takes within its ambit all heads of income. This Court wasof the opinion that while amending Section 10(2) (vi) of theIndian Income Tax Act, 1922 by the Amendment Act 25 of1953, the Parliament has accepted the interpretation placedupon the said expression by several High Courts to the aboveeffect. It referred to the decisions of Lahore High Court inKaram Ilahi Mohammad Shafi v. CIT, (1929) 3 ITC 456,Madras High Court in A. Suppan Chettiar & Co. v. CIT, (1929)4 ITC 211, East Punjab High Court in Laxmichand JaipuriaSpg. & Wvg. Mills, In re, (1950) 18 ITR 919 and BombayHigh Court in Ambika Silk Mills Co. Ltd. v. CIT, (1952) 22 ITR 58 besides the judgment of the Judicial Commissioner,Nagpur in Ballarpur Collieries v. CIT, (1929) 4 ITC 255interpreting the said expression as covering all heads ofincome. The Court further pointed out that even after the saidamendment, the Bombay and Gujarat High Courts have takenthe same view in CIT v. Ravi Industries Ltd., (1963) 49 ITR145 and CIT v. Girdharlal Harivallabhadas Mills CompanyLimited, (1064) 51 ITR 693 respectively. The contrary viewtaken by the Madras High Court in CIT v. B. Nagi Reddy,(1964) 51 ITR 178 was disapproved. The court then observed(at page 559 of 59 ITR): ITR 58 besides the judgment of the Judicial Commissioner,Nagpur in Ballarpur Collieries v. CIT, (1929) 4 ITC 255interpreting the said expression as covering all heads ofincome. The Court further pointed out that even after the saidamendment, the Bombay and Gujarat High Courts have takenthe same view in CIT v. Ravi Industries Ltd., (1963) 49 ITR145 and CIT v. Girdharlal Harivallabhadas Mills CompanyLimited, (1064) 51 ITR 693 respectively. The contrary viewtaken by the Madras High Court in CIT v. B. Nagi Reddy,(1964) 51 ITR 178 was disapproved. The court then observed(at page 559 of 59 ITR): "Bearing these two considerations in mind, ifone looks at the language of proviso (b) to section10(2)(vi), the first question that arises is: What is themeaning of the expression "in the assessment of theassessee or if the assessee is a registered firm, in theassessment of the partners, full effect cannot be givento any such allowance in any year? … Taking the caseof the partners of a registered firm, the assessmentmust be their individual assessment, i.e, assessments inwhich the profits from the firm and other sources arepooled together. The legislature is clearly assuming thateffect can be given to depreciation allowance in theassessment of a partner; the only way effect can begiven in the assessment of a partner is by setting it ofagainst income, profits and gains under other heads.The learned counsel for the revenue tried to meet thisinference by suggesting that what the legislaturecontemplated was an assessment of those partners whowere carrying on other business. But in our opinion thissuggestion is unsound. What would happen if apartnership consists of four partners, two carrying onother business, Mr. Sastri was unable to explain. Now,if this is the inference to be drawn from these words, itis quite clear that the words "no profits or gainschargeable for that year" are not confined to profits andgains derived from the business whose income is beingcomputed under section 10." To the same effect is the decision in Rajapalayam MillsLtd. v. CIT, (1978) 115 I.T.R. 777. The court observed thatwhen the profits or gains of a business for a particularassessment year are to be computed under Section 10 (of 1922Act), the current depreciation allowance for the assessmentyear in question is deductible under clause (vi) of Section10(2), but the depreciation allowance of the preceding yearswould be liable to be taken into account only if, and to theextent to which, it is not absorbed by the total income of theassessee computed under different heads and chargeable to taxfor those assessment years. The Court observed (at page 785): "Now, it is well settled, as a result of the decision ofthis court in CIT v. Jaipuria China Clay Mines (P) Ltd.,[1966] 59 ITR 555 (SC), that the words ‘no profits orgains chargeable for that year’ are not confined toprofits and gains derived from the business whoseincome is being computed under section 10, but theyrefer to the totality of the profits or gains computedunder the various heads and chargeable to tax." and added (at page 785): "Now, it is well settled, as a result of the decision ofthis court in CIT v. Jaipuria China Clay Mines (P) Ltd.,[1966] 59 ITR 555 (SC), that the words ‘no profits orgains chargeable for that year’ are not confined toprofits and gains derived from the business whoseincome is being computed under section 10, but theyrefer to the totality of the profits or gains computedunder the various heads and chargeable to tax." and added (at page 785): "It is, therefore, clear that effect must be given todepreciation allowance first against the profits or gainsof the particular business whose income is beingcomputed under section 10 and if the profits of thatbusiness are not sufficient to absorb the depreciationallowance, the allowance to the extent to which it is notabsorbed would be set off against the profits of anyother business and if a part of the depreciationallowance still remains unabsorbed, it would be liableto be set off against the profits or gains chargeableunder any other head and it is only if some part of thedepreciation allowance still remains unabsorbed that itcan be carried forward to the next assessment year. …But where any part of the depreciation allowanceremains unabsorbed after being set off against the totalincome chargeable to tax, it can be carried forwardunder proviso (b) to clause (vi) to the following yearand set off against the year's income and so on forsucceeding years. The method adopted by the statutefor achieving this result is that the carried forwarddepreciation allowance is deemed to be part of andstands on exactly the same footing as the currentdepreciation for the assessment year and is thusallowable as a deduction under clause (vi)." Both these decisions are rendered by a Bench of threelearned Judges and are binding upon us.” 15.From the above, it is evident that Supreme Court held that theexpression “profits or gains chargeable” could not be confined to profitsand gains from the business whose income was being computed underSection 10 of the Act. Proceeding further, Supreme Court held that effectmust be given to depreciation allowance first against the profits or gainsof the particular business whose income was being computed underSection 10 and if the profits of that business are not sufficient to absorb the depreciation allowance, the allowance to the extent to which it wasnot absorbed would be set-off against the profits of any other businessand if a part of the depreciation allowance still remained unabsorbed, itwould be liable to be set-off against the profits or gains chargeable underany other head and it is only if some part of the depreciation allowancestill remained unabsorbed then only it can be carried forward to the nextassessment year. Supreme Court explained that carried forwarddepreciation allowance is deemed to be part of and stands on exactly thesame footing as the current depreciation for the assessment year underconsideration and thus allowable as a deduction. 16.Following the decision of the Supreme Court in VirmaniIndustries Pvt. Ltd. (supra), Tribunal took the view that this issue wasconclusively decided and therefore, not allowing setting off the carriedforward depreciation with the income of the assessment year underconsideration was a mistake made by the assessing officer which wasapparent from the record. When this mistake was pointed out to theassessing officer, he had rightly rectified the same under Section 154. 17.In so far contention of Mr. Pinto that carried forward depreciationcannot be set-off against deemed income is concerned, we are of theview that such a situation does not arise in the present case. 18.On a thorough consideration of the matter, we are in agreementwith the view expressed by the Tribunal and find no error or infirmitytherein. Therefore, the proposed question of law does not arise out of thesaid order of the Tribunal. 19.Consequently, appeal is dismissed. However, there shall be noorder as to costs. (MILIND N. JADHAV, J.) 17.In so far contention of Mr. Pinto that carried forward depreciationcannot be set-off against deemed income is concerned, we are of theview that such a situation does not arise in the present case. 18.On a thorough consideration of the matter, we are in agreementwith the view expressed by the Tribunal and find no error or infirmitytherein. Therefore, the proposed question of law does not arise out of thesaid order of the Tribunal. 19.Consequently, appeal is dismissed. However, there shall be noorder as to costs. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.)