2004 (8) TMI 8 - HC - Income Tax

1. Whether Tribunal was legally justified in setting aside the order of the Commissioner of Income-tax passed under section 263? 2. Whether Tribunal was correct in holding that since the event of retrospective amendment made in section 80J had occurred after the framing of the assessment on February 13, 1980, the Commissioner of Income-tax could not validly assume jurisdiction under section 263? - It is not in dispute that after the retrospective amendment the provisions of the statute exclude the borrowed capital from being taken into consideration for working out the capital employed under section 80J of the Act. As a result of the retrospective amendment made in the aforesaid section the position under law would be that during the assessment year in question borrowed capital had to necessarily be excluded and the same has not to be taken into consideration while working out the capital employed. The order is therefore erroneous and prejudicial to the interests of the Revenue. Thus CIT was justified in setting aside the order of the assessing authority in exercise of jurisdiction under section 263 - In view of the foregoing discussion we answer both the questions of law referred to us in the negative, i.e., in favour of the Revenue and against the assessee

Summary

Issues:
1. Validity of setting aside the order of the Commissioner of Income-tax under section 263 of the Income-tax Act.
2. Impact of retrospective amendment on jurisdiction under section 263 of the Act.

Issue 1: Validity of setting aside the order of the Commissioner of Income-tax under section 263 of the Income-tax Act:

The case involved a firm assessed for the year 1977-78 with the original assessment completed on February 13, 1980. The Commissioner of Income-tax, Lucknow, found an error in considering borrowed capital for working out the capital employed and issued a notice under section 263(1) of the Act. The Tribunal set aside the Commissioner's order, stating that the retrospective amendment in section 80J, effective from August 21, 1980, did not justify the Commissioner's jurisdiction under section 263 as it occurred post the assessment date. The Tribunal referred to the decision of the Calcutta High Court in Ganga Properties v. ITO [1979] 118 ITR 447 to support its decision. The Tribunal's view was that the retrospective amendment could not be a basis for the Commissioner's action under section 263. Consequently, the Tribunal allowed the appeal and overturned the order of the Commissioner.

Issue 2: Impact of retrospective amendment on jurisdiction under section 263 of the Act:

The Revenue contended that the retrospective amendment in section 80J, introduced by the Finance (No. 2) Act, 1980, effective from August 21, 1980, necessitated the exclusion of borrowed capital for computing the capital employed. The Revenue argued that the assessment order was erroneous and prejudicial to its interests. The retrospective amendment excluded borrowed capital from consideration for working out the capital employed under section 80J. Thus, the Revenue asserted that the Commissioner was justified in setting aside the assessing authority's order under section 263. The High Court agreed with the Revenue's position, emphasizing that the retrospective amendment mandated the exclusion of borrowed capital for the relevant assessment year, rendering the original order erroneous. Consequently, the High Court ruled in favor of the Revenue, upholding the Commissioner's action under section 263.

In conclusion, the High Court ruled in favor of the Revenue on both issues, supporting the Commissioner's decision to set aside the original assessment order under section 263 of the Income-tax Act due to the impact of a retrospective amendment on the computation of capital employed.