2019 (11) TMI 1106 - HC - Income Tax

Revision u/s 263 - set off of any loss against the undisclosed income - addition u/s 68 - HELD THAT - Undisclosed income assessed under Section 68 need not be treated as an income falling totally outside the ambit of the classifications contained in Section 14 of the Act. Even assuming for the sake of argument that, it will not fall within the classifications contained in Section 14, it is evident that, as on the date of the assessment such income was included under a special classification by virtue of Section 115BBE. It is pertinent to note that, 115BBE had prohibited allowance of deductions alone, as it stood unamended as on the relevant date of the assessment. The explanatory notes to the provisions of the Finance Act, 2016 enumerates the reasons for introduction of the further amendment barring the set off, with effect from 1.4.2017. The intention of the legislature in introducing the amendment, as stated in the explanatory note, is to avoid unnecessary litigation and to expressly provide that no set off of any loss shall be allowable in respect of income under Section 68. Therefore, it has to be held that, as on the relevant date of the assessment, there was no bar existed with respect to allowing set off against the carried forward unabsorbed depreciation on fixed assets, with respect to income under Section 68. Therefore, we are of the view that, Tribunal had committed an illegality in coming to the conclusion that the deemed income will not fall even under the head of income from other sources and therefore the deductions and set off applicable to income under other heads will not be attracted in the case of deemed income covered under the provisions of Section 68 - Decided in favour of assessee

Issues Involved:

1. Jurisdiction of the Commissioner of Income Tax under Section 263 of the Income Tax Act.
2. Set off of brought forward losses against deemed income under Section 68.
3. Applicability of the judgment in P.D. Abraham's case.
4. Tribunal's decision sustaining the order of the Commissioner of Income Tax.
5. Consideration of Section 115BBE and its amendments.
6. Legality of disallowing set off of brought forward losses against deemed income for the assessment year 2013-2014.

Issue-Wise Detailed Analysis:

1. Jurisdiction of the Commissioner of Income Tax under Section 263 of the Income Tax Act:

The appellant challenged the jurisdiction exercised by the Principal Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act. The CIT initiated suo motu revision proceedings, contending that the Assessing Officer (AO) erroneously allowed the set off of brought forward loss against deemed income under Section 68, which was prejudicial to the interest of the revenue. The High Court examined whether the CIT's exercise of jurisdiction was justified, considering the binding precedents and the factual matrix.

2. Set off of brought forward losses against deemed income under Section 68:

The Tribunal upheld the CIT's order, relying on the judgment in CIT v. Kerala Sponge Iron Ltd. and the Gujarat High Court's decision in Fakir Mohmed Haji Hasan v. CIT. It was held that deemed income under Section 68 could not be classified under any heads of income under Section 14 of the Act. Consequently, set off of brought forward losses against such deemed income was not permissible. The High Court analyzed these precedents and the nature of deemed income to determine the correctness of the Tribunal's decision.

3. Applicability of the judgment in P.D. Abraham's case:

The appellant argued that the Tribunal erred in not considering the binding judgment in P.D. Abraham's case, which dealt with the classification of unexplained income as business income. The High Court scrutinized whether the Tribunal and CIT failed to account for this precedent, which could impact the treatment of deemed income under Section 68.

4. Tribunal's decision sustaining the order of the Commissioner of Income Tax:

The High Court reviewed the Tribunal's reliance on prior judgments and its conclusion that income under Section 68 could not be classified under any heads of income, thus disallowing set off. The appellant contended that the Tribunal's decision was flawed, given the conflicting judgments and the principles established in subsequent cases.

5. Consideration of Section 115BBE and its amendments:

The appellant highlighted that Section 115BBE, introduced by the Finance Act, 2012, and its subsequent amendment by the Finance Act, 2016, should be considered. The original provision barred deductions for deemed income under Section 68 but did not explicitly prohibit set off of losses until the 2016 amendment. The High Court examined whether the Tribunal and CIT overlooked the prospective nature of the amendment and the binding departmental circular clarifying the same.

6. Legality of disallowing set off of brought forward losses against deemed income for the assessment year 2013-2014:

The High Court analyzed whether the Tribunal and CIT erred in disallowing the set off of brought forward losses against deemed income for the assessment year 2013-2014. The court considered the nature of deemed income, relevant precedents, and the statutory provisions to determine the legality of the disallowance.

Conclusion:

The High Court concluded that the Tribunal committed an illegality by holding that deemed income under Section 68 could not be classified under any heads of income and thus disallowing set off. The court noted that as on the relevant date of assessment, Section 115BBE only prohibited deductions, not set off of losses. The Tribunal's decision was set aside, and the original assessment order allowing the set off was sustained. The appeal was allowed in favor of the assessee, and any coercive recovery steps based on the revised assessment were disallowed.

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