2011 (5) TMI 495 - HC - Income Tax

Revision u/s 263 - whether the assessee is justified in claiming set off of brought forward losses of previous years against this dividend income giving it the character of business income even though assessed as income from other sources - assessee is a non-banking finance company engaged in the business of investment in shares, securities, other debt instruments and financing loans and providing guarantees - CIT observed that the balance sheet of the assessee company shows that all the investments in shares of bodies corporate was grouped as long-term investment and no part of investment had been considered stock-in-trade and was not grouped as part of current assets - The assessment order is totally silent and there is no discussion as to how this dividend income was to be given the character of business income for the purpose of set off under Section 72 of the Act - This rendered order passed by the AO erroneous and prejudicial to the interest of Revenue to that extent - Decided against the assessee As order of the CIT dated 07.03.2008 passed under Section 263 of the Act is restored, the impugned order dated 22.06.2009 and order dated 02.02.2010 passed by the CIT (A) and the AO are set aside and the matter is restored to the file of the CIT (A) to decide the appeal of the assessee on merits insofar as challenge of the assessee to orders dated 30.07.2008 passed by the AO under Section 143(3)/263 of the Act is concerned - Appeal is disposed of

Summary

Issues Involved:
1. Validity of the CIT's order under Section 263 of the Income Tax Act.
2. Treatment of dividend income for the purpose of set off against brought forward business losses.

Detailed Analysis:

1. Validity of the CIT's Order under Section 263 of the Income Tax Act:

The CIT exercised its powers under Section 263 of the Income Tax Act, arguing that the AO had not properly considered certain items, leading to an escapement of income. The CIT restored the matter back to the AO for fresh consideration. The Tribunal set aside the CIT's order, stating that the AO's view was plausible. The High Court, however, found that the AO had not conducted any inquiry into whether the dividend income could be given the character of business income for the purpose of set off under Section 72 of the Act. The Tribunal's failure to recognize the limited scope of appeal before it and its overreach in addressing the merits of the issue led to the High Court setting aside the Tribunal's order. The High Court emphasized that the CIT had rightly noticed the lack of investigation by the AO, rendering the AO's order erroneous and prejudicial to the interest of Revenue.

2. Treatment of Dividend Income for the Purpose of Set Off Against Brought Forward Business Losses:

The core issue was whether the dividend income earned by the assessee could be treated as business income for the purpose of set off against brought forward business losses. The assessee, a non-banking company engaged in investment and financing, had shown dividend income as business income. The AO treated it as income from other sources but allowed the set off of business losses against it. The CIT observed that the AO had wrongly allowed this set off, as per Section 72(1) of the Act, which only allows business losses to be set off against business income. The Tribunal, however, concluded that the dividend income could be treated as business income, citing various case laws. The High Court acknowledged that while dividend income is generally assessed under the head "Income from Other Sources" as per Section 56(2) of the Act, its commercial character could still be considered for set off purposes. The High Court referred to several judgments, including those of the Supreme Court, which supported the view that income from dividends could be treated as business income if the shares were part of the trading assets. However, the High Court noted that the AO had not applied his mind to this issue, leading to the CIT's justified intervention under Section 263.

Conclusion:

The High Court ruled in favor of the Revenue, setting aside the Tribunal's order and restoring the CIT's order under Section 263. The AO's failure to investigate the character of the dividend income justified the CIT's revisionary powers. The High Court also set aside subsequent orders by the CIT (A) and the AO, restoring the matter to the CIT (A) for a decision on the merits of the assessee's appeal against the AO's order dated 30.07.2008. The appeals were disposed of accordingly.