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TMI Blog2006 (11) TMI 671X X X X Extracts X X X X X X X X Extracts X X X X ..... ith law after examining the issue, which is the subject matter of revision in the impugned order. 4. That the Commissioner of Income-tax erred on facts and in law in not appreciating that the issue regarding allowability of interest expense being a subject matter of appeal before the Commissioner of Income-tax (Appeals), the jurisdiction of the Commissioner of Income-tax to revise the order in respect of the same was ousted in view of Explanation (c) to sub-section (1) of section 263 of the Act. 5. That the Commissioner of Income-tax erred on facts and in law in not appreciating that the impugned order could not be passed in view of the proviso to section 14A of the Act. 6. That the Commissioner of Income-tax erred on facts and in law in bifurcating the interest paid between dividend and interest income and directing the assessing officer to (a) disallow deduction for interest to the extent of ₹ 9,27,43,620, attributable to earning of dividend income, and (b) allow deduction for balance interest amounting to ₹ 28,69,691 against interest income assessable under the head other sources . 7. That the Commissioner of Income-tax erred on facts and in law in disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard on several judgments including the judgement of the Hon'ble Supreme Court in the case of CIT vs. Distributors (Baroda) P. Ltd., 83 ITR 377. Learned AR for the assessee further submitted that the claim of the assessee has been accepted by the Assessing Officer after application of mind and thereafter the interest expenditure incurred by the assessee has been allowed under section 36 (1)(iii). He pointed out that the Assessing Officer had even disallowed a part of the interest paid to the sister concern on the money borrowed for investing in shares under section 40A(2)(b). It has been pleaded that since the assessee had not made any investment with the intention of earning dividend income, no part of the interest could be attributed to the said income. Reliance in this regard has been placed on the judgement of the Hon'ble Supreme Court in the case of CIT vs. Dr. V.R. Gopinathan reported in 248 ITR at Page 449. Learned AR for the assessee further pleaded that a part of the interest debited was disallowed by the Assessing Officer under section 40A(2)(b) towards excess interest allegedly paid to the sister concern. Since the allowability of interest was the subject ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initely prejudicial to the interests of revenue. (ii) Even Board's circular No. 11 dated 23.07.01 prescribed that proceedings which had become final before 1.4.2001 should not be reopened. In the present case, assessment order which is the subject matter of revision u/s 263 was passed on 13th March 2002 which is much after 1st April 2001 and thus the Circular NO. 11 does not bar its re-opening/revision. (iii) The proviso to sec. 14A was inserted by the Finance Act 2002 w.r.e.f. 11.05.01 and it prohibited reassessment u/s 147 or rectification u/s 154 and obviously it would be applicable to assessment proceedings completed before 11.05.01. In the case under consideration, the assessment order was passed on 13.03.02 and this assessment order was erroneous because the Assessing Officer had failed to consider and apply the provisions of sec. 14A as these existed on the date of assessment and this error is prejudicial to the interests of revenue. Therefore, sec. 263 is clearly applicable and its application does not go against the intention of the legislature. 6. After disposing of the legal objections of the assessee, the learned Commissioner of Income Tax also considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, cannot be allowed as deduction because it represents expenditure incurred in relation to dividend income which does not form part of the total income under this Act. However, the balance amount of ₹ 28,69,691/- [(95613312x71656)/2387458] is relatable to interest income assessable under the head 'other sources' and would be allowable as deduction against this income of ₹ 71,658/-. 8. We have considered the rival submissions of both the parties, perused the record and carefully gone through the order of CIT passed u/s 263, as well as, the order of AO passed u/s 143(3) of l.T.Act and the case law relied upon by both the parties. 9. In order to resolve the controversies involved in the instant case of the assessee we would first like to state the undisputed facts relevant for the disposal of the points under controversy. The original assessment u/s 143(3) was completed by the AO on 13.3.2002. In that assessment order the AO only considered the allowability of interest u/s 36(1)(iii) and u/s 40 A(2)(b) of I.T. Act. The provisions of section 14 A of l.T.Act was inserted by Finance Act, 2001 w.e.f. 1.4.1962. The proviso below section 14 A of I.T. Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO u/s 143(3) against which the appeal was filed by the assessee and thereafter the second appeal has also been filed by the department before the Tribunal and the same was dismissed by the Tribunal vide order dated 28.4.2006 passed in ITA No. 3624 (Del) 2003 assessment year 1999-2000. As per the Doctrine of Merger the order of Assessing Officer has since merged with the order of CIT(A) and ultimately with that of the Tribunal, the CIT was ousted from his revisional powers u/s 263(1) of I.T. Act to revise the assessment order passed by the Assessing Officer. In support thereof leaned AR placed reliance on Smt. Sujata Grover vs. Dy. CIT, ITAT, Delhi Bench 'E' [2002] 74 TTJ (Del) 347, Sonal Garments v. JCIT, 95 1TD pg. 363. Shara (I) Mutual Benefit Co. v. ACIT [2002] 74 TTJ (All) 67, Saw Pipes Ltd. vs. ACIT, 94 TTJ (Del) 1036 wherein it has been held that as per the theory of merger once an issue has been considered by a CIT(A), all the aspects of that issue would be deemed to have merged with it and no aspect related to that issue can be considered by the CIT in proceedings u/s 263. It is important to note that in all the cases (supra) relied upon by ld. AR for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not the reasoning; of the subordinate forum; otherwise there would be an apparent contradiction. Secondly, the doctrine of merger has a limited application. Their Lordships further held the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior authority and the other by a superior authority, passed in an appeal or revision, there is a fusion or merger of two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. Lastly, their Lordships observed at page 664 - A court is not bound by an earlier decision if it was rendered without any argument, without, reference to the crucial words of the rule and without any citation of the authority . A decision which is not express and is not founded on reasons, nor which proceeds on consideration of the issues, cannot be deemed to be a law declared, to have a binding effect as is contemplated by article 141. 16. Their Lordships in the case of Arbuda Mills Ltd. (supra) while interpreting the meaning of Explanation C to section 263(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccasion or inquiry and there was no determination by the first appellate authority with reference to the rate of depreciation allowed by the Income Tax Officer. That apart of the order of the Income Tax Officer granting the depreciation remained undisturbed even after the order passed by the Commissioner of Income-tax in appeal and, hence, it could not be said that the order of the Income Tax Officer granting depreciation at the particular rate had merged with the order of the Commissioner of Income Tax (Appeals). Hence, the order of the Commissioner of Income-tax (Appeals) did not in any way preclude the Commissioner from exercising the power of revision under section 263. 19. From the ratio of the decisions (supra) the powers of CIT u/s 263 of I.T.Act regarding revisional jurisdiction can be summed up in the words - The pre-condition for merger of an order of a lower authority in that of the higher authority is that the matter in question decided by the lower authority should have been considered and decided by the higher authorities in the appeal preferred against the order of the lower authority. Where a part of the order of the Income-tax Officer was not considered and dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer nor by the appellate authorities. Hence, we hold that as per Explanation C to Section 263(1) of I.T. Act the CIT has rightly invoked his revisional jurisdiction u/s 263 of l.T.Act in considering the allowability of the interest expenditure claimed by the assessee under section 14A of the Act on the dividend income earned by the assessee. 22. The next point raised by the learned AR for the assessee and required to be considered by us is whether the order u/s 263 passed by the CIT is bad in law because the ITAT Cochin Bench in the case of Paul John Delicious Cashew Co. vs. ITO, [2005] 94 ITD 131 (Cochin), has held that - Section 14 A was introduced by the Finance Act, 2001 with retrospective effect from 1.4.1962. It will have far-reaching consequences. The settled cases of almost half a century will be unsettled by this retrospective operation. The CBDT realized the consequences, and issued Circular No. 11 of 2001 dated 23.7.2001. The Circular of the Board is binding on all income-tax authorities. From Section 263, it is very clear that first of all the order passed by the Assessing Officer should be erroneous and also it should be prejudicial to the interest of rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsider the existing statutory provisions of section 14A. Accordingly, the facts of the instant case of the assessee being at variance with the facts of the case (Supra) decided by the Cochin Bench, the case (supra) of the Cochin Bench relied upon by the learned AR for the assessee is of no help to the assessee. 24. Now, the next question requires to be looked into by us is whether the proviso inserted by the Finance Act, 2002 with retrospective effect 11.5.2001 creates any bar against the CIT in invoking his revisionary jurisdiction under section 263 read with Explanation - C of the Act. 25. On carefully going through the proviso to section 14A, we find that in fact the legislature never intended to restrict the revisionary powers of CIT under section 263 or the powers of appellate authorities already conferred on them under the statute in considering the provisions of Section 14A while considering the matters, which come up for consideration before them otherwise, the legislature could have also included their names alongwith the Assessing Officer in restricting their powers. Since in the proviso to section 14A of the Act the section 263 has been omitted it means that the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejudicial to the interest of revenue and hence CIT has rightly invoked his powers under Explanation-C to section 263 (1) of the Act in view of ratio of decisions of Apex Court in the case Shri Arbuda Mills Ltd. (supra) wherein they held that as per Explanation-C to Section 263(1) introduced w.r.e.f. 1st June 1989 extends to such items, which have not been considered and decided in the appeal filed by the assessee because from the ratio of the decision (supra) we can safely conclude that even the powers of CIT under section 263 would also definitely extend to those assessment orders passed by the Assessing Officer in which he has neither considered nor applied the existing statutory provisions of section 14A of Income Tax Act nor the same were applied and considered by the 1st appellate authority or by 2nd appellate authority. 29. Now, we shall deal with the last contention of the assessee that in the instant case the assessee company was engaged in the business of holding investments in shares and securities with the intention of retaining controlling stake in two Jindal Group of Companies and the company did not sell any of its investments ever since their purchase. This activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the instant case of the assessee by the CIT (A). On account of the detailed reasoning given in the order of CIT and to avoid repetition we are not mentioning the same again in our order. In the instant case the facts are that the assessee company had invested ₹ 68.6 crores for acquisition of shares at face value of its two sister concerns of Jindal Group of Companies, and, according to the assessee these investments were made to acquire for controlling interest, management etc. of these companies and not merely to earn dividend on those shares. For this investment the assessee company had raised inter-corporate loan of ₹ 57.6 crores on which interest @ 19% amounting to ₹ 9,38,45,483/- was paid, whereas, total expenditure debited by the assessee was ₹ 9,56,13,312/- and the total receipts credited were only ₹ 23,87,458/- which included an income of ₹ 23,15,802/- on account of dividend. In the year under consideration the assessee has not entered into a transaction of sale and purchase of shares. In the decision (supra), the [ITAT Delhi Bench, in identical facts, held that this nature of investment in shares on which the assessee has earned div ..... X X X X Extracts X X X X X X X X Extracts X X X X
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