TMI Blog2008 (2) TMI 533X X X X Extracts X X X X X X X X Extracts X X X X ..... 154. The relevant details were, to be called for and examined. Therefore, the order of the Assessing Officer was definitely erroneous and also prejudicial to the interest of the revenue insofar as the disallowance of expenses under section 14A is concerned. As regards the contention of the assessee that the order passed under section 263 is bad in law because he has acted merely on the proposal of Addl. CIT without independent application of mind, we do not find any substance in the same. The order clearly shows that along with the proposal, the Addl. CIT had also sent the case records and these were examined by the CIT. Therefore, it cannot be said that CIT, Jammu acted merely on the proposal sent to him. Therefore, this plea is rejected and the judgment in the case of B A Plantation Industries Ltd. v. CIT [ 2006 (12) TMI 101 - GAUHATI HIGH COURT] is not applicable to the facts of this case. Therefore, we are of the opinion that the order of assessment read with order u/s 154 was erroneous and prejudicial to the interest of revenue so far as disallowance of expenses under section 14A in relation to income claimed exempt is concerned. Both conditions laid down in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. Since the facts of the case for the assessment year under consideration are similar to the facts of the case for the other assessment years, we are of the opinion that the principle of consistency also deserves to be followed. Thus, we are of the considered opinion that the ld. CIT was not justified in holding that the assessee was not entitled to exemption under section 10(23G) of the Act. The assessment order read with order under section 154 for allowing exemption of income under section 10(23G) cannot be considered as erroneous and prejudicial to the interests of revenue. Therefore, order of CIT under section 263 on this issue is set aside. Accordingly, this part of the ground is allowed. In the result, the appeal filed by the assessee is partly allowed. - Member(s) : JOGINDER PALL., A. D. JAIN. ORDER Per Joginder Pall, Accountant Member.-This appeal of the assessee has been filed against the order of Commissioner of Income-tax, Jammu (in short, "CIT") passed under section 263 of the Income-tax Act, 1961 (in short, "the Act") for the assessment year 2002-03. 2. The only effective ground raised in the appeal is as under: "1. The Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom record, the same may be rectified under section 154 of the Act. Accepting the contentions of the assessee, the Assessing Officer allowed the exemption of income aggregating to Rs. 36.10 crores under section 10(15), 10(23G) and 10(33) of the Act by observing as under: "Exempted Income under section 10(15), 10(23G) and 10(33) amounting to Rs. 36,10,19,907. This income is the income which have been earned by the bank but exempt under section 10 detailed as under. 10(15) : Rs. 6,86,45,804 10(23G) : Rs. 20,57,03,438 10(33) : Rs. 8,66,70,665 The ld. counsel of the assessee have shown necessary evidences from the records and it is found that this income has wrongly been added to the income of the bank and the same is reduced from the income already assessed under section 143(3). (-361019907)" 3.1 Subsequently, the Additional Income-tax Commissioner, Range-1, Jammu, submitted a proposal under section 263 of the Act vide his letter dated 24-11-2006 stating therein that the order under section 143(3) dated 30-3-2005 read with order under section 154 dated 18-5-2005 passed by the Assessing Officer was erroneous and prejudicial to the interest of revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of ITAT, Amritsar Bench, in assessee's own case for the assessment year 1992-93 in ITA No. 68 (Asr.)/1997, where deduction under section 80M was claimed and the Tribunal upheld the order of the CIT(A) to the extent that only expenses of Rs. 25,000 were to be considered against dividend income. Reliance was also placed on two judgments of Hon'ble Bombay High Court in the cases of CIT v. General Insurance Corporation of India (No. 1) [2002] 254 ITR 203 and CIT v. Central Bank of India [2003] 264 ITR 522, where it was held that expenses incurred on account of salary paid to staff, stamp duty, transfer fees and safe custody charges disallowed by the Assessing Officer but allowed by the Hon'ble High Court on the ground that these were not directly relatable to earning of dividend income. Three judgments of Hon'ble Calcutta High Court in the cases of CIT v. National and Grindlays Bank Ltd. [1993] 202 ITR 559, CIT v. United Collieries Ltd. [1993] 203 ITR 857 and CIT v. Enemour Investments Ltd. [1994] 72 Taxman 370 were also pressed into service. Reliance was also placed on two decisions of ITAT, Delhi Benches on the issue of section 14A of the Act in Maruti Udyog Ltd. v. Dy. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was entitled to exemption under section 10(23G) of the Act. Relying on the judgment of Hon'ble Supreme Court in the ease of Malabar Industrial Co. Ltd v. CIT [2000] 243 ITR 83, it was contended that in order to assume jurisdiction under section 263 by the CIT, two conditions must be satisfied simultaneously i.e., (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of revenue. It was submitted that the CIT cannot assume jurisdiction under section 263 in cases where divergent views have been expressed by different High Courts and the order passed by the lower Authority is in accordance with the view of the jurisdictional Bench. Reliance was also placed on the judgment of Hon'ble Supreme Court in the case of CIT v. G.M. Mittal Stainless Steel (P.) Ltd. [2003] 263 ITR 255. 4. The ld. CIT considered the aforesaid submissions and observed that the ld. counsel has agreed that section 14A of the Act was applicable to this case. The ld. CIT observed that admittedly at the time of passing order under section 143(3), read with section 154, the Assessing Officer did not consider the provisions of section 14A before a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under section 80M, the proportional management expenses are required to be deducted from dividend receipts. Thus, the ld. CIT(A) held that action of the Assessing Officer not to consider disallowance of expenditure incurred in relation to income claimed exempt and not forming part of total income was erroneous and prejudicial to the interest of the revenue. 4.1 As regards second point on which the ld. CIT had proposed the action under section 263 that the assessee was not entitled to exemption of its income under section 10(23G) of the Act, the ld. CIT referred to the memorandum explaining the provisions of Finance (No. 2) Bill, 1996, vide which the said provision was brought to the statute and observed that the tax exemption was available only to such 'Infrastructure Capital Fund' or 'Infrastructure Capital Company', which are established for the purpose of mobilising resources for financing infrastructure facilities. He observed that since the assessee was not established for the purposes of mobilising resources for financing infrastructure facilities, it cannot be termed as "Infrastructure Capital Company'. Therefore, the assessee was not entitled to exemption claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that thereafter the assessee received a show-cause notice from CIT proposing action under section 263 on two grounds that while allowing exemption i.e., (i) the Assessing Officer neither considered the provisions of section 14A nor made any enquiry for the purpose of computing disallowance of expenses in respect of income claimed exempt, and (ii) the assessee was not entitled to exemption of its income under section 10(23G). The ld. counsel submitted that a detailed reply to the show-cause notice issued by the CIT was submitted vide letter dated 19-3-2007 and the same has been reproduced by the CIT at pages 3 to 13 of the impugned order. Relying on the judgment of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd., the ld. AR submitted that the jurisdiction of the CIT to revise order passed by the Assessing Officer can be assumed only if twin conditions i.e., (i) the order sought to be revised must be erroneous and (ii) it must be prejudicial to the interests of the revenue. He submitted that in regard to the allegation that while allowing exemption of income claimed by the assessee, the Assessing Officer had neither made enquiry nor referred to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80M of the Act. He further relied on the decision of ITAT, Delhi Bench in the case of Maruti Udyog Ltd. which was referred to by the Tribunal in the case of Eicher Ltd. He further referred to the judgment of Hon'ble Madhya Pradesh High Court in the case of State Bank of Indore v. CIT [2005] 275 ITR 23, where the Hon'ble High Court has held that the expenditure to be considered against dividend income for the purpose of allowing deduction under section 80M is actual expenditure and not notional expenditure. He also relied on the two decisions of Hon'ble Bombay High Court in the cases of General Insurance Corporation of India (No. 1) and Central Bank of India, where it has been held that deduction under section 80M has to be allowed in respect of net income computed as per provisions of the Act and the rule of proportionate expenditure and interest contemplated by section 20, as it then stood, could not be imported into section 80M. He submitted that establishment expenses are common and these were not incurred exclusively for the purpose of earning income claimed exempt by the assessee. Therefore, no expenses on that account could be allocated for disallowance on proportionate basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that income of a Co-operative Bank by way of interest, dividends (other than dividends referred to in section 115-O) and long-term capital gains from investments made by way of equity or long-term finance in an approved enterprise will also be exempt from payment of income-tax. This means that all other banks which were companies are covered under the definition of "Infrastructure Capital Company" for the purpose of exemption under section 10(23G). Thus, the ld. counsel submitted that the assessee has been allowed exemption under section 10(23G) right from the assessment year 1999-2000 to 2004-05. He referred to a copy of the assessment order passed under section 143(3) for the assessment year 2003-04, and for the assessment year 2004-05. He submitted that these assessments were completed under section 143(3). Therefore, the principle of consistency is required to be followed in this case. For this proposition, he relied on the following judgments: (i) The judgment of Hon'ble Delhi High Court in the case of DIT (Exemption) v. Lovely Bal Shiksha Parishad [2004] 266 ITR 349. (ii) The judgment of Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at would be exempt under clause (23G) of section 10 is the income by way of dividend, interest or long-term capital gain and not the gross receipts. He, therefore, argued that the failure on the part of the assessee to consider the expenses relating to income not forming part of total income and thereby allowing deduction of the entire gross income was against the provisions of the Act, resulting in prejudice to the revenue. Thus, he submitted that the ld. CIT was justified in coming to the conclusion that the order of the Assessing Officer was erroneous and prejudicial to the interest of the revenue. He also relied on the following judgments: (i) The judgment of Hon'ble Supreme Court in the case of United General Trust Ltd., where it was held that the proportionate management expenses are to be considered against dividend income while computing deduction under section 80M. (ii) The judgment of Hon'ble Supreme Court in the case of CIT v. Raison Industries Ltd. [2007] 288 ITR 322 dated 4-1-2007, 2006-ITS-06, where it was held that order under section 263 cannot be held to be bad in law merely because an order of rectification was passed]. (iii) The decision of ITAT, Delhi Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the judgments/decisions of the Tribunal were applicable to the provisions of section 80M and not in respect of income claimed as exempt. He further relied on the judgment of Hon'ble Supreme Court in the case of Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323, where the order for revision passed by the CIT was upheld, even though it was claimed that some other person was liable to tax on income. 7. We have heard both the parties and carefully considered the rival submissions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below, referred to the relevant provisions of the Act and the pages of the paper book to which our attention has been drawn. The judgments relied upon by the parties have also been referred to. From the facts discussed above, it is obvious that at the time of completing the assessment for the assessment year under consideration under section 143(3), the Assessing Officer did not allow the claim of exemption of its income made under section 10(15), 10(23G) and 10(33) on the ground that the assessee failed to furnish the requisite documentary evidence and details for claiming exemption. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned in section 263 were not satisfied so as to enable the CIT(A) to assume jurisdiction under section 263 of the Act. Now the question that requires to be decided by this Bench is whether the CIT(A) was justified in law to exercise his powers vested under section 263 of the Act in setting aside the assessment order read with order under section 154 of the Act passed by the Assessing Officer. Before dealing with the merits of the case, it would be relevant to reproduce herein the main provisions of section 263 of the Act which read as under: "263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation. - For the removal of doubts, it is hereby declared that, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no jurisdiction to revise such order under section 263 of the Act. Thus, it is quite clear that in order to confer jurisdiction on the CIT under section 263, both the conditions mentioned above must be fulfilled simultaneously. This issue was considered by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. relied upon by the ld. AR, where it was held that prerequisite for the exercise of jurisdiction by the CIT is that the twin conditions must be satisfied i.e., (i) the order of the Assessing Officer sought to be revised is erroneous and (ii) it is prejudicial to the interests of the revenue. The Apex Court observed that if one of these conditions is absent i.e., if the order of Assessing Officer is erroneous but is not prejudicial to the revenue - recourse cannot be had to section 263 of the Act. The same view has been held by the various other judgments relied upon by the ld. AR. 7.1 Now the aspect that requires to be considered by this Bench is whether both the conditions laid down under section 263 can be said to have been fulfilled in this case. In order to answer this issue, we have to first find out the meaning of expressions used in the section an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind The phrase "prejudicial to the interests of the revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase "prejudicial to the interests of the revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, no disallowance was called for. It is the claim of the assessee that sufficient amount of surplus funds were available with the assessee to make investment in shares or long-term advances to enterprises engaged in providing infrastructure facility and, therefore, no disallowance was called for. We are unable to accept this position, for the simple reason that the Assessing Officer has not examined this issue at all either at the time of completing the assessment or at the time of passing an order under section 154. No finding has been recorded by the Assessing Officer to the effect that the assessee had not incurred any expenditure for earning huge amount of exempt income of Rs. 36.10 crores. What was required to be done by the Assessing Officer is to enquire into the expenditure incurred by the assessee for earning income claimed exempt under the aforesaid sections of the Act. In fact, the assessee had itself referred to the decision of ITAT, Amritsar Bench in assessee's own case in ITA No. 68 (Asr.)/1997 for the assessment year 1992-93. The said decision related to deduction in respect of dividend income of Rs. 2,13,60,578 under section 80M of the Act. The Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal. Therefore, when we consider income of Rs. 36.10 crores, the disallowance would be of much higher magnitude. In any case an enquiry and examination was required to be made by the Assessing Officer at the time of completing the assessment and passing an order under section 154. The relevant details were, to be called for and examined. Therefore, the order of the Assessing Officer was definitely erroneous and also prejudicial to the interest of the revenue insofar as the disallowance of expenses under section 14A is concerned. 7.5 We may mention that various decisions relied upon by both the parties are on the issue of considering expenses for the purpose of allowing deduction under section 80M. There are some decisions, which are with reference to the provisions of section 14A of the Act. Two decisions of ITAT, Delhi Benches in the cases of Eicher Ltd. and Maruti Udyog Ltd. support the view that expenditure actually incurred in relation to income which does not form part of the total income is to be made and disallowance of management expenses on proportionate basis cannot be made. However, there is unanimity of the view in all the decisions that expenditure incurred in rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 14A while allowing exemption of income of Rs. 36.10 crores. 9. Now we take up the second ground on which CIT has revised the order under section 263. The same relates to allowing of exemption under section 10(23G) of the Act. The undisputed facts of the case are that section 10(23G) was introduced by the Finance (No. 2) Act, 1996 with effect from 1-4-1997. The assessee had claimed and was being allowed exemption of its income under section 10(23C) for the earlier as well as subsequent assessment years in respect of which assessment under section 143(3) had been made. Before we record our findings on the validity of the action of the CIT on this issue, it would be appropriate to reproduce the relevant provisions of section 10(23G) applicable to the assessment year under consideration. The same are reproduced as under: "10(23G): any income by way of dividends, (other than dividends referred to section 115-O), interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company or a cooperative bank from investments made on or after the 1st day of June, 1998 by way of shares of long-term finance in any enterprise or un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation thereto say that the 'Infrastructure capital company' should be established only for the purposes of mobilising resources for financing infrastructure facilities. There is no dispute about the fact that the income in respect of which assessee has claimed exemption has been earned by way of dividends on investment in shares and interest on long-terms finance in the infrastructure enterprise. The claim of the assessee is that it is covered under the expression "Infrastructure capital company" because it has made investment by way of acquiring shares or long-term finance to an enterprises engaged in the business of providing infrastructure facility. Both the revenue and the assessee have referred to Explanatory Notes on provisions of the Finance (No. 2) Act, 1996, in Circular No. 762, dated 18-2-1998 explaining the purpose of providing such exemption. We consider it appropriate to reproduce hereunder the relevant paragraphs explaining the provisions inserted in the Act: "17.1 In recognition of the need for adequate infrastructure facility which is vital for accelerating the economic development of the country, the existing provisions of the Income-tax Act provide a five ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces for financing infrastructure facilities are entitled to exemption of its income under section 10(23G). The basic purpose of providing tax incentives is to encourage investment in the infrastructure facilities which are vital for the economic development of the country. Earlier, the Legislature had provided incentives to the enterprises engaged in the business of developing, maintaining and operating any infrastructure facility in the form of sections 80-IA and 80-IB of the Act. However, these measures were not found adequate. Therefore, the Legislature felt that the tax incentives should also be provided to investors in such sector. Therefore, section 10(23G) was introduced in the Act. There is no dispute about the fact that the assessee is a banking company. The essential feature of the business of a banking company is to mobilise resources from the public and lend it on interest to various sectors. The revenue has not denied that assessee had indeed made investment in shares and providing long-term finance to enterprises engaged in infrastructural facility. Therefore, all the conditions laid down for claiming exemption under section 10(23G) are fulfilled by the assessee. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of dividend, interest and long-term capital gains of infrastructure capital funds or infrastructure capital companies from investments in shares and long-term finance to an enterprise wholly engaged in infrastructure business, housing hotel or hospital industry. An infrastructure capital company is defined as one that carries on the business of developing, maintaining, operating various infrastructure projects, developing, special economic zones, developing and building housing projects, constructing certain specified hotels or specified hospitals. The Government, in 2006, had justified removing the exemption since the interest rate regime and softened, reducing the overall cost of projects. Even if banks were given exemption on income from investment in infrastructure projects, it remains to be seen whether they would pass on the benefit to the borrower. There are three key issues that are constraints for the banking sector while lending to infrastructure-availability of long-term debt, sectoral limits for various infrastructure - availability of long-term debt, exposure to single and group borrowers (Source: The Economic Times, dated January 19, 2008). From the above ..... X X X X Extracts X X X X X X X X Extracts X X X X
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