The Commissioner Of Income Tax, Chennai v. M/S.indian Overseas Bank, Balance Sheet Management Department, Chennai-2

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMand THE HONOURABLE MR.JUSTICE SATHI KUMAR SUKUMARA KURUP Tax Case Appeal No.64 of 2015 The Commissioner of Income Tax, Chennai... AppellantVs M/s.Indian Overseas Bank,Balance Sheet ManagementDepartment, Chennai-2... Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 08.8.2014 passed by the Income TaxAppellate Tribunal, Madras 'B' Bench, Chennai made inI.T.A.No.1384/Mds/2014 for the assessment year 2004-05. Against the order of the Commissioner of Income Tax, LTU,Chennai dated 26.03.2014 in C.No.136/LTU/263/2013-14, for theAssessment year 2004-2005 against the order of the DeputyCommissioner of Income Tax, Large Tax Payer Unit, Chennai dated30.12.2011 in G.I/PAN No. for the Assessment year2004-2005. Judgment was delivered by T.S.SIVAGNANAM,J This appeal has been filed by the Revenue under Section260A of the Income Tax Act, 1961 ('the Act' for brevity)challenging the order dated 08.8.2014 passed by the Income TaxAppellate Tribunal, Madras 'B' Bench, Chennai (the Tribunal forbrevity) made in I.T.A.No.1384/ Mds/2014 for the assessment year2004-05. 2. The above appeal was admitted on 03.11.2015 to considerthe following substantial questions of law: https://hcservices.ecourts.gov.in/hcservices/ “1. Whether, on the facts and in thecircumstances of the case, the Tribunal wasright in holding that the order passed underSection 263, which set aside the assessmentorder dated 26.12.2011 was barred bylimitation as per Section 263(2) ? and 2. Is not the finding of the Tribunalbad by holding that the order passed underSection 263 was against the order made underSection 143(3) dated 28.12.2006 and not inrespect of order passed under Section 143(3)read with Section 147 dated 26.12.2011 ?” 3. We have heard Mrs.R.Hemalatha, learned Senior StandingCounsel for the appellant – Revenue and Mr.R.Vijayaraghavan,learned counsel appearing for the respondent – assessee. 4. The assessee filed their return of income for the yearunder consideration and it was processed under Section 143(1) ofthe Act on 28.3.2005. Subsequently, the case was selected forscrutiny and a notice under Section 143(2) of the Act dated12.9.2005 was issued. After the case was discussed, theassessment was completed under Section 143(3) of the Act videorder dated 28.12.2006. Thereafter, the assessment was reopenedby notice dated 22.2.2011. The assessee addressed to theAssessing Officer requesting reasons for reopening. Further, thereasons were communicated to the assessee by letter dated12.8.2011. 5. The reasons for reopening are as hereunder : “1. It has been observed from theassessment proceedings of the AY 2004-05 thatthe assessee has made investments in M/s.IOBProperties Pte Limited situated outside India(Singapore). During the current year M/s.IOBProperties Pte Limited has merged with IndianOverseas Bank and a sum of Rs.7.77 Croresrepresenting the net surplus in theinvestment was appropriated to capitalreserve. Since the IOB Properties Pte Limitedis not incorporated in India, the surplusarising out of merger is taxable in India asper the provisions of the Indian Income TaxAct. In view of the above, it is clear thatthe assessee has not furnished all thematerial facts fully and truly in the returnof income for the purpose of assessment onthe above issue. 2. Further, assessee has debited anamount of Rs.93,04,142/- as prior perioditems during the current year. Since theassessee is following mercantile system ofaccounting, the same cannot be allowed asdeduction in the current year. Reliance inthis regard is placed on the decision of theHon'ble Kerala High Court in the case of CITVs. Southern Cables & Engineering Works [289ITR 167].” 2. Further, assessee has debited anamount of Rs.93,04,142/- as prior perioditems during the current year. Since theassessee is following mercantile system ofaccounting, the same cannot be allowed asdeduction in the current year. Reliance inthis regard is placed on the decision of theHon'ble Kerala High Court in the case of CITVs. Southern Cables & Engineering Works [289ITR 167].” 6. The assessee submitted their reply dated 13.9.2006.Thereafter, the assessment was completed by order dated30.12.2011 under Section 143(3) read with Section 147 of theAct. The Assessing Officer, after taking into consideration thereply given by the assessee, held that no disallowance wasrequired to be made in respect the prior period expenses. Inother words, the explanation offered by the assessee was foundto be satisfactory by the Assessing Officer. 7. Thereafter, the Commissioner of Income Tax (Large TaxPayer Unit) [for short, the CIT] issued a notice under Section263(1) of the Act stating that the assessment proceedings wereerroneous and prejudicial to the interest of Revenue. The casewas discussed by affording an opportunity of personal hearing.The assessee objected to the exercise of power under Section 263(1) of the Act on the ground of limitation as well as on merits.However, by order dated 26.3.2014, the objections raised by theassessee were rejected by the CIT, the reassessment order dated30.12.2011 was set aside and the matter was sent back to theAssessing Officer for de novo consideration with regard to theclaim of business loss of Rs.72.75 Crores. 8. Aggrieved by that, the assessee preferred an appealbefore the Tribunal, which, by the impugned order dated08.8.2014, allowed the appeal. As against that, the Revenue isbefore us by way of this appeal. 9. The issue, which falls for consideration in this appeal,is as to whether the proceedings initiated under Section 263(1)of the Act were beyond the period of limitation. 10. In the preceding paragraphs, we have noted the factsand they are recapitulated as hereunder : The original assessment was completed under Section 143(3)of the Act by order dated 28.12.2006. The re-assessment wascompleted by order dated 30.12.2011. If, according to the CIT,the order of re-assessment was erroneous and prejudicial to theinterest of Revenue, he could have exercised his powers under https://hcservices.ecourts.gov.in/hcservices/ Section 263(1) of the Act within the period of limitation underSection 263(2) of the Act i.e before expiry of two years fromthe end of financial year, in which, the order sought to berevised was passed. Therefore, the period of limitation wouldcommence from 31.3.2007 and would come to an end on 31.3.2009. 11. Admittedly, the proceedings under Section 263(1) of theAct were initiated much beyond the said date and if 31.3.2009 isthe date, on which, the limitation expires, the proceedingsunder Section 263 of the Act have to be held to be time barred.The CIT was of the view that the limitation would commence fromthe end of the financial year, in which, the re-assessmentproceedings were completed i.e on 31.3.2012 and if this date istaken, then the exercise of power under Section 263 of the Actwould be within the period of limitation. 12. In the preceding paragraphs, we have set out thereasons for reopening and we find the issue pertaining to theclaim of business loss of Rs.72.75 Crores was not one of thereasons for reopening. In fact, the Assessing Officer issued anotice to the assessee on 18.7.2006 raising 16 queries, ofwhich, query No.11 related to the nature and allowability of theclaim of loss arising out of non recoverable investments beingstock in trade written off debited to provision for depreciationon investments – Rs.72,75,00,000/-. 12. In the preceding paragraphs, we have set out thereasons for reopening and we find the issue pertaining to theclaim of business loss of Rs.72.75 Crores was not one of thereasons for reopening. In fact, the Assessing Officer issued anotice to the assessee on 18.7.2006 raising 16 queries, ofwhich, query No.11 related to the nature and allowability of theclaim of loss arising out of non recoverable investments beingstock in trade written off debited to provision for depreciationon investments – Rs.72,75,00,000/-. 13. The assessee submitted their reply dated 13.9.2006stating that the said amount of Rs.72,75,00,000/-, being nonrecoverable investments, were written off during the year bydebit to provision for depreciation on investment account andthat the provision made in each year towards depreciation oninvestments was added back and offered to tax. Therefore, it wassubmitted that when the non recoverable investments were writtenoff by debit to the provision account, the same had to beallowed as deduction in computing the total income. 14. Thus, the explanation offered by the assessee was foundto be acceptable by the Assessing Officer and the assessment wascompleted under Section 143(3) of the Act by order dated28.12.2006. This aspect of the matter has not even been referredto by the CIT when the notice was issued under Section 263(1) ofthe Act. 15. The question as to whether the date, on which the orderunder Section 147 of the Act was passed should be reckoned asthe starting point of limitation, considering the facts andcircumstances of the case, has been dealt with by severaldecisions of the Hon'ble Supreme Court and the earliest of suchdecisions is in the case of CIT Vs. Alagendran Finance Limited[reported in (2007) 293 ITR 1] wherein it was held that in respect of an issue, which was not subject matter ofreassessment, limitation under Section 263(2) of the Act wouldrun from the date of original assessment and that revisionalproceedings initiated in respect of such issue beyond the periodof two years from the date of original assessment were barred bylimitation. 16. The relevant portion of the said judgment reads asfollows : “We, therefore, are clearly of theopinion that keeping in view the facts andcircumstances of this case and, inparticular, having regard to the fact thatthe Commissioner of Income Tax exercisingits revisional jurisdiction reopened theorder of assessment only in relation tolease equalization fund which being not thesubject of the reassessment proceedings, theperiod of limitation provided for under Sub-Section (2) of Section 263 of the Act wouldbegin to run from the date of the order ofassessment and not from the order ofreassessment. The revisional jurisdictionhaving, thus, been invoked by theCommissioner of Income Tax beyond the periodof limitation, it was wholly withoutjurisdiction rendering the entire proceedinga nullity.” “We, therefore, are clearly of theopinion that keeping in view the facts andcircumstances of this case and, inparticular, having regard to the fact thatthe Commissioner of Income Tax exercisingits revisional jurisdiction reopened theorder of assessment only in relation tolease equalization fund which being not thesubject of the reassessment proceedings, theperiod of limitation provided for under Sub-Section (2) of Section 263 of the Act wouldbegin to run from the date of the order ofassessment and not from the order ofreassessment. The revisional jurisdictionhaving, thus, been invoked by theCommissioner of Income Tax beyond the periodof limitation, it was wholly withoutjurisdiction rendering the entire proceedinga nullity.” 17. The High Court of Bombay, in the decision in the caseof Ashoka Buildcon Ltd. vs ACIT [reported in (2010) 325 ITR574], while considering a similar issue and after following thesaid decision of the Hon'ble Supreme Court in the case ofAlagendran Finance Limited, held that where an assessment hasbeen reopened under Section 147 of the Act in relation to aparticular ground or in relation to certain specified groundsand subsequent to the passing of the order of reassessment, thejurisdiction under Section 263 of the Act is sought to beexercised with reference to issues which do not form the subjectof the reopening of the assessment or the order of reassessment,the period of limitation provided for in Sub-Section (2)of Section 263 of the Act would commence from the date of theorder of assessment and not from the date on which the orderreopening the reassessment has been passed. It was further heldthat the order of assessment cannot be regarded as beingsubsumed within the order of reassessment in respect of thoseitems which do not form part of the order of reassessment. 18. As pointed out earlier, the reasons for reopening underSection 147 of the Act were only two and the issue, on which, https://hcservices.ecourts.gov.in/hcservices/ the CIT sent the notice under Section 263 of the Act waspertaining to a claim of business loss of Rs.72.75 Crores, whichwas not one of the issues in the re-assessment proceedings, butwas an issue, which was raised by the Assessing Officer in theoriginal assessment under Section 143(3) of the Act, in which, ashow case notice was issued, the assessee submitted theirexplanation and thereafter, the assessment was completed. 19. For all purposes, if, according to the CIT, thedecision on the claim of business loss was erroneous andprejudicial to the interest of Revenue, then the proceedingsunder Section 263 of the Act ought to have commenced before31.3.2009. Therefore, by applying the above decisions, the onlyconclusion that can be arrived is to hold that the proceedingsare barred by limitation. 20. The learned Senior Standing Counsel appearing for theappellant – Revenue has placed reliance on the decision of theBombay High Court in the case of CIT-3 Vs. ICICI Bank Ltd.[ITA.No.6375 of 2010 dated 08.2.2012]. 19. For all purposes, if, according to the CIT, thedecision on the claim of business loss was erroneous andprejudicial to the interest of Revenue, then the proceedingsunder Section 263 of the Act ought to have commenced before31.3.2009. Therefore, by applying the above decisions, the onlyconclusion that can be arrived is to hold that the proceedingsare barred by limitation. 20. The learned Senior Standing Counsel appearing for theappellant – Revenue has placed reliance on the decision of theBombay High Court in the case of CIT-3 Vs. ICICI Bank Ltd.[ITA.No.6375 of 2010 dated 08.2.2012]. 21. In the decision of the Bombay High Court in the case ofICICI Bank Ltd., the substantial question of law framed forconsideration was as to whether, in the circumstances of thecase, the Tribunal was right in holding that the order of theCIT passed under Section 263 of the Act was barred by limitationunder Section 263(2) of the Act. While answering the saidquestion, it was held that the order of assessment under Section143(3) of the Act allowed the deduction, which was claimed underSections 36(1)(vii) and 36(1)(viia) of the Act and that neitherin the first order of re-assessment dated 22.2.2000 nor in thesecond order of re-assessment dated 26.3.2002 were these aspectsdetermined. In other words, it was held that on the threeissues, the original order of assessment dated 10.3.1999 passedunder Section 143(3) of the Act continued to hold the field andif that is the factual position, the doctrine of merger wouldnot apply. 22. The learned Senior Standing Counsel appearing for theappellant has placed reliance on Explanation III to Section 147of the Act and submitted that there is enough power vested withthe Assessing Officer to assess or re-assess the income inrespect of any issue, which has escaped assessment and suchissue comes to his notice subsequently in the course of theproceedings under Section 147 of the Act notwithstanding thatthe reasons for such issue have not been included in the reasonsrecorded under Sub-Section (2) of Section 148 of the Act. 23. In our considered view, Explanation III to Section 147of the Act will not alter the position nor improve the case of the Revenue. By virtue of the said Explanation, the AssessingOfficer is empowered to assess or re-assess income in respect ofany issue, though it has not been specifically mentioned as areason for reopening under Section 148(2) of the Act. 24. However, in the case on hand, the jurisdiction underSection 263(1) of the Act was exercised with reference to anissue, which was covered in the original assessment order dated28.12.2006 and it was not an issue, based on which, thereopening of assessment was made under Section 143 of the Act.For all purposes, the period prescribed under Sub-Section (2) ofSection 263 of the Act should commence from 31.3.2007 and thetwo years' period would come to an end on 31.3.2009. As it isnot in dispute that the proceedings under Section 263 of the Actwere initiated well beyond the said date, exercise of such powerhas to be held to be without jurisdiction and barred bylimitation. 25. For all the above reasons, the tax case appeal isdismissed and the substantial questions of law framed areanswered against the Revenue. No costs. Sd/- Assistant Registrar(CS IV) //True Copy// Sub Assistant Registrar RS To 1.The Income Tax Appellate Tribunal, 'B' Bench, Chennai. Chennai. 2.The Commissioner of Income Tax, Chennai. Chennai. 3.The Commissioner of Income Tax, Large Tax Payer Unit, 1775, Jawaharlal Nehru Inner Ring Road, Anna Nagar Western Extension, Chennai - 600 101. 4.The Deputy Commissioner of Income Tax, Large Tax Payer Unit, Chennai - 600 101. +1cc to Mr.T.Ravikumar, Advocate Sr No.39502+1cc to M/s.Subbaraya Aiyar, Advocate Sr No.39622 TCA.No.64 of 2015 SMI (CO)PR (27/08/2021)