9911796707
TMI Blog2006 (4) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... shown as trading assets but in the balance sheet they are shown under investments , still the acceptance of the Department in several years in the past that the shares were held as stock-in-trade, indicated by their conduct in accepting the profits or losses on sale of those shares under the head Business is a circumstance strong enough to displace any ambiguity created by the entry in the balance sheet. Thus the case can be brought under the principle laid down by the Supreme Court in Bengal Assam Investors Ltd. vs. CIT [ 1965 (11) TMI 31 - SUPREME COURT] by reason of the actual conduct of the assessee supported by its income-tax assessments. That apart, though it may not be necessary to go to that extent, it may be noticed that in CIT vs. Amalgamations (P) Ltd.[ 1997 (4) TMI 8 - SUPREME COURT] there is an observation of the Supreme Court that the Madras High Court, from whose decision the appeal arose, has rightly pointed out that the business of the assessee-company is the holding of investments and if with reference to the business of holding investments, any expenditure had been incurred that could have been allowed as a deduction . Thus, we set aside the order of the CIT pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses incurred in relation to the exempt income can be allowed. The second was the allowability of the losses under s. 72, which according to the CIT was erroneously allowed as there was no business activity during the year. He, therefore, called upon the assessee to show cause why the assessment cannot be revised by (a) disallowing the proportionate expenses in respect of dividend income under s. 14A and (b) disallowing the business loss from being carried forward to the subsequent years on the ground that no business activity was carried on during the year. 5. The assessee pointed out that the proportionate expenses relatable to the dividend income cannot be disallowed because according to the proviso to s. 14A no assessment made for the asst. yr. 2001-02 or any earlier assessment year can be reopened or rectified to increase the liability of the assessee by invoking the provisions of the section and what the AO could not under law do, the CIT also cannot do by invoking s. 263 of the Act. Arguments were also taken on the merits of the claim of expenses. As regards the business loss to be carried forward under s. 72, the assessee contended that though the dividend income was asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f. 7. The assessee is in further appeal. Mr. Vohra for the assessee says that so far as the ultimate decision of the CIT is concerned, namely that the assessee would not be entitled to any deduction on account of interest under s. 36(1)(iii), there was no mention of this ground in the show-cause notice issued by him and hence his decision is invalid. He says that an order under s. 263 cannot be passed on a ground which is not stated in the show-cause notice and cites the following authorities in support of the contention: (a) S.S.I. Limited vs. Dy. CIT (2004) 85 TTJ (Chennai) 1049 (b) Asia Resort Ltd. vs. Asstt. CIT (2004) 85 TTJ (Chd) 466 (c) Peerless General Finance & Investment Co. Ltd. vs. Asstt. CIT (2005) 96 TTJ (Cal) 834 : (2006) 5 SOT 17 (Cal) Mr. Vohra further contends that the issue of a show-cause notice is part and parcel of the rules of natural justice and its purpose is to make the assessee aware of the case against it so that it can effectively meet the same and if no such opportunity is given and the order is passed on a ground different from the one stated in the notice, and of which the assessee has had no notice, the decision of the CIT must be invalidate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld have an adequate opportunity of meeting the error before the final order is made." (underlining, italicised in print, ours) In the case before the High Court, the show-cause notice referred to two issues to which the assessee had given satisfactory replies. No action was taken under s. 263 in respect of these two issues. However, in the said order the CIT mentioned the hire charges as the ground for revising the assessment. This point had not been mentioned as a ground in the show-cause notice. The High Court held that "inasmuch as the CIT had not chosen to show these two points as the errors in making the final order and the final order under s. 263 refers only to the inference of hire charges being exigible to tax which was not mentioned at all in the show-cause, obviously the assessee had no opportunity to meet that point". 10. The ratio of the decision, clear from the above observations, is that if a ground of revision is not mentioned in the show-cause notice issued under s. 263, that ground cannot be made the basis of the order passed under the section, for the simple reason that the assessee would have had no opportunity to meet the point. It is pertin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... When this is the position, it cannot be argued that the show-cause notice must be understood as containing a reference to s. 36(1)(iii) also. The facts of the present case, therefore. are distinguishable from the facts before the Supreme Court in the case of Rampyari Saraogi. 11. The other judgment which supports the case of the assessee is that of the Punjab & Haryana High Court in CIT vs. Jagadhri Electric Supply & Industrial Co. (1981) 25 CTR (P&H) 94 : (1983) 140 ITR 490 (P&H). The nature of the jurisdiction of the CIT under s. 263 and the powers of the Tribunal while dealing with an appeal against the order passed under that section were explained in that decision. The CIT had found the order of the AO allowing continuation of registration to the assessee-firm to be erroneous on the ground that the actual distribution of the profits was different from the ratio mentioned in the deed of partnership. The Tribunal set aside the order of the CIT but while doing so observed that there was a change in the number of partners from 10 to 11 which fact had not been taken into account by the AO when he granted registration for the firm for the asst. yr. 1966-67 and thus the grant of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it was a fit ground for taking action under the section, with the result that the final order, if based on the ground which he had earlier considered not fit for taking action under the section, will have to be set aside as not based on any ground which may justify his belief that the order passed by the AO was erroneous insofar as it is prejudicial to the interests of the Revenue. It is, therefore, not for the Tribunal to understand the grounds of revision in a manner different from the manner in which the CIT has made out and to seek to uphold the order of revision in its own understanding of the grounds of revision. 12. This is precisely what appears to have happened in the case before us. According to the show-cause notice, the action for revision was not proposed to be taken on the ground that the allowance of interest on monies borrowed for the acquisition of the shares under s. 36(1)(iii) was erroneous and prejudicial to the interests of the Revenue. But this was the only ground on which the ultimate order under s. 263 was passed. The order cannot be sustained, in the light of the above two judgments and the orders of the Tribunal cited above. 13. We must now notice a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessment under s. 36(1)(iii). The assessee thus did not have an opportunity to meet the case made out ultimately in the order of revision. This goes to the root of the validity of the order. 14. Even if we are wrong in our above conclusions, it seems to us even on merits that there is no justification for holding that the AO was not right in allowing the interest as a deduction. Firstly, the order of the AO has been passed after due application of mind. Though on the face of it there is no discussion in the assessment order about the claim of interest, we find that the assessee has added back the interest in the computation of income by saying "interest paid on loans taken/funds utilized for purchase of capital assets (not claimed as expenditure).... Rs. 37,00,464/-". This add-back is out of the total "interest and bank charges" of Rs. 85,25,039/- claimed as deduction in the P&L a/c. The computation of income for income-tax purposes commences from the figure of net profit as per the P&L a/c. Thus, what has been claimed as a deduction is the interest which is paid on borrowings made for acquisition of shares held as trading assets, viz., the shares in Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced in the order cannot lead to the conclusion that the order is erroneous or prejudicial to the interests of the Revenue on the ground of non-application of mind. It must be remembered that the power of the CIT under s. 263 is to "call for and examine the record of any proceeding under the Act" and not merely to call for the order ultimately passed therein, for the purpose of ascertaining whether the order passed by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue. The correctness or validity of the order passed by the AO and the findings recorded therein have, therefore, to be examined in the light of the record. The application of mind on the part of the AO may also be shown by the record and not merely by the order passed by him. We are satisfied in the present case that the AO had accepted the claim of the assessee for allowance of the interest under s. 36(1)(iii) only after satisfying himself as to the correctness thereof in the light of the contentions put forth in the assessee's letters and the facts already on the record. 15. Secondly, we are also inclined to agree with the contention of the learned counsel for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they were shown as part of "investments". Factually, the contention is correct. But the inference which would follow is not always that the income from those shares on sale thereof will be on capital account and not as profits of the business. It is the conduct of the assessee which is more important and the entry made in the balance sheet is not always conclusive, though may be relevant. In Dalhousie Investment Trust Co. Ltd. vs. CIT (1968) 68 ITR 486 (SC) the Supreme Court held, in a case where there was no evidence to show that the shares shown as investment were converted into stock-in-trade, that though the shares were never shown in the accounts as stock-in-trade, but since the profits on sale thereof were taxed as revenue income and since there was evidence to show that even initially when they were acquired they were acquired with a view to earning profit, the accounting entry was not taken to be conclusive. In the case before us, though it is only in the computation of income that the shares of Max India Ltd. are shown as "trading assets" but in the balance sheet they are shown under "investments", still the acceptance of the Department in sev ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
