1998 (7) TMI 25 - HC - Income Tax

Issues Involved:
1. Applicability of Section 40A(8)/58(2) of the Income-tax Act, 1961.
2. Disallowance of interest under Section 40A(8)/58(2).
3. Rectification of assessment under Section 154 of the Income-tax Act.
4. Maintainability of petitions under Section 264 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Applicability of Section 40A(8)/58(2) of the Income-tax Act, 1961:
The petitioner argued that Section 40A(8)/58(2) of the Income-tax Act, 1961, was not applicable to them as they were a miscellaneous financial company referred to in sub-clause (vi) of clause (c) of the Explanation to Section 40A(8)/58(2). The Commissioner of Income-tax (Appeals) had previously accepted this contention for the assessment years 1983-84 and 1984-85, directing the Income-tax Officer to delete the disallowance of interest. The High Court noted that the first respondent (Income-tax Officer) had accepted this position for certain assessment years but failed to apply the same for the years 1976-77, 1977-78, 1980-81, 1981-82, and 1982-83, which was inconsistent and unjustified.

2. Disallowance of Interest under Section 40A(8)/58(2):
The petitioner objected to the disallowance of interest under Section 40A(8)/58(2) on the grounds that only the interest attributable to the business should be disallowed. The Commissioner of Income-tax (Appeals) supported this view, stating that "interest payments made by an assessee under the head 'Business' should be subjected to a 15 per cent. disallowance" and similarly for "Income from other sources," but not for other interest payments such as "Interest on securities" and "House property." The High Court found that the Income-tax Officer's refusal to rectify the assessment based on this interpretation was incorrect.

3. Rectification of Assessment under Section 154 of the Income-tax Act:
The petitioner sought rectification of the assessment under Section 154, arguing that the disallowance of interest under Section 40A(8)/58(2) was not applicable to them. The Income-tax Officer dismissed these petitions on the grounds that the petitioner was not a financial company as defined and that the major head of income was from property. The High Court held that the Income-tax Officer's dismissal of the petitions under Section 154 was incorrect, as the issue of whether Section 40A(8)/58(2) applied was not the subject-matter of the appeal to the Commissioner (Appeals).

4. Maintainability of Petitions under Section 264 of the Income-tax Act:
The first respondent dismissed the petitions under Section 264 on the technical ground that the petitioner had filed an appeal against the disallowance of interest under Section 40A(8)/58(2), citing Section 154(1A) as a bar. The High Court found that this dismissal was incorrect, as no appeals had been filed against the order refusing to rectify the assessment under Section 154. Furthermore, the High Court noted that the first respondent had previously accepted the petitioner's contention for other assessment years, rendering the technical dismissal inconsistent and unjustified.

Conclusion:
The High Court concluded that the petitioner had made a clear case in their favor. The orders impugned in the writ petitions were quashed, and the respondents were directed to delete the disallowance of interest under Section 40A(8)/58(2) of the Income-tax Act. The petitions were allowed as prayed for, with no costs.

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