2014 (9) TMI 553 - HC - Income Tax

Revision u/s 263 - Applicability of section 36(1)(viii) - Whether the Tribunal was correct in holding that two views are possible with regard to the applicability of Section 36(1)(viii) r.w.s. 41(4A) even though the provisions of Section 36(1)(viii) as amended with effect from 1/4/1997 do not provide any room for interpretation other than the one adopted by the Commissioner of Income Tax in his order passed u/s 263 of the Income Tax Act Held that - Merely because the Tribunal adopts one of two views possible and that has resulted in loss of the Revenue it cannot be treated as erroneous order prejudicial to the interest of the Revenue unless the view taken by the tribunal is unsustainable in law - there was no justification for invoking section 263 and setting aside the order of the AO there is no justification in setting aside the order of the AO - there is no justification in assailing the order of the tribunal which correctly held that there was no obligation to maintain the fund, when the fund was created and the withdrawal of the fund from the special reserve was before the obligation to maintain the fund came into effect on 1st April, 1998 - The withdrawals that have occasioned in the each of the above petitions do not fall foul of law - There are no errors apparent on the face of the record Decided against revenue.

Issues Involved:
1. Whether the Tribunal was right in quashing the order of the Commissioner of Income Tax passed under Section 263 of the Income Tax Act.
2. Whether the Tribunal was correct in holding that two views are possible with regard to the applicability of Section 36(1)(viii) read with Section 41(4A) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Quashing of the Order under Section 263:
The appeals pertain to the assessment years 2003-04 and 2004-05, focusing on Section 36(1)(viii) of the Income Tax Act, which allows a special reserve to be created by financial corporations. The Commissioner of Income Tax (CIT) had invoked Section 263, arguing that the assessment was erroneous and prejudicial to the interests of the revenue because the amounts withdrawn from the special reserve should be taxed. The Tribunal quashed this order, holding that the CIT's action was based on a misapplication of the law.

2. Applicability of Section 36(1)(viii) and Section 41(4A):
Initially, Section 36(1)(viii) allowed for the creation of a special reserve without the obligation to maintain it. This provision was amended effective from 1st April 1998, requiring the reserve to be maintained. Section 41(4A) was also introduced, stipulating that any amount withdrawn from the special reserve would be taxable in the year of withdrawal. The Respondents argued that since the special reserve was created before the amendment, the withdrawal of funds should not attract tax under the amended provisions.

Arguments from Both Sides:
- Revenue's Argument: The CIT was correct in including the withdrawn amounts in the total income, as the amendments to Section 36(1)(viii) and the introduction of Section 41(4A) should apply. The Tribunal's decision to set aside the CIT's order was erroneous and prejudicial to the interests of the revenue.
- Respondent's Argument: The amendments to Section 36(1)(viii) and the introduction of Section 41(4A) are prospective and do not apply to reserves created before 1st April 1998. The Respondents cited various judgments to support their contention that the amendments should not affect previously created reserves.

Court's Analysis and Conclusion:
The court held that merely because the Tribunal adopted one of two possible views, it does not render the order erroneous or prejudicial to the interests of the revenue. The court referred to several judgments, including Malabar Industrial Co. Ltd. vs. CIT, to emphasize that an order can only be revised under Section 263 if it is both erroneous and prejudicial to the interests of the revenue. The court found that the Tribunal's view was sustainable in law and that the amendments to Section 36(1)(viii) and the introduction of Section 41(4A) were prospective, effective from 1st April 1998. Therefore, the withdrawals from the special reserve created before this date should not be taxed.

Judgment:
The court affirmed the Tribunal's decision, holding that there was no obligation to maintain the special reserve created before 1st April 1998, and the withdrawals did not attract tax. The appeals were dismissed, and the questions were answered in favor of the assessee and against the revenue. No order as to costs was made.

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