The Commissioner of Income Tax, Thrissur Vs. the Dhanalakshmi Bank Ltd., Thrissur - Court Judgment

Ramachandran Nair, J.

1. These review petitions are filed by the Revenue based on observations made by the Honourable Supreme Court while disposing of Special Leave Petitions filed against the judgment of this Court rendered in Income Tax Appeals relating to the respondent assessee. The respondent is a Banking Institution which has incurred expenditure for earning income that is exempt from payment of tax and do not constitute part of the total income assessable under the Income Tax Act, 1961 (hereinafter referred to as the Act for short). Section 14A of the Act is a new provision introduced in the Income Tax Act by Finance Act, 2001 with retrospective effect from 01/04/1962 under which expenditure incurred by the assessee for earning income which does not form part of total income is not an allowable deduction. Even though the main provision of Section 14A is given retrospectivity the proviso imposed a prohibition against the Assessing Officer from revising a concluded assessment either under Section 147 or under Section 154 for making disallowance and for raising demand of tax or for demanding excess tax refunded. For easy reference Section 14A with the proviso is extracted hereunder.

"Section 14A. Expenditure incurred in relation to income not includible in total income.

(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001)

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) applyThe relation to a case where an assessee provisions of sub-section (2) shall also in claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act."

In these cases, the Assessing Officer completed assessments without making disallowances under Section 14A even though the assessee had incurred expenditure mainly by way of interest incurred on borrowed funds diverted for investments in securities, shares etc, the income wherefrom were exempt from tax. By virtue of the prohibition contained in the proviso, the Assessing Officer was disabled from either making income escaping assessment under Section 147 or by rectifying assessment under Section 154. However, since the proviso to Section 14A does not expressly bar the Commissioner from invoking suomotu revisional powers under Section 263 of the Act, in exercise of such powers the Commissioner set aside the assessments and directed reassessment for making disallowances for the past years. When the matter reached the Tribunal, the Tribunal allowed assessee's claim by holding that disallowance cannot be made by reopening of concluded assessments in exercise of powers conferred under Section 263 of the Act by the Commissioner. It is against these orders, the matter reached this Court in appeals.

2. It may be noticed from the judgments under Review that the above issue raised in all the cases were decided by us following our judgment in ITA No.587/2009 dated 14/01/2010. The Revenue has not challenged the judgment in the main case which is stated to be for the reason that the disallowance involved is a small amount. However, in these cases, the Revenue filed Special Leave Petitions before the Supreme Court wherein they relied on our judgment apparently on the same issue in Catholic Syrian Bank Ltd. v. CIT, reported in 330 ITR 556. The Honourable Supreme Court felt that the view taken by this Court in the judgment above referred was not considered by us while deciding the appeals.

Therefore, the SLPs were closed leaving freedom to the Revenue to approach this Court with the Review Petitions, and hence the matter is before us. We have to necessarily consider the review petitions with regard to our two judgments above referred.

3. So far as the decision of this Court in Catholic Syrian Bank Ltd. v. CIT, reported in 330 ITR 556 is concerned, we were called upon to decide the scope of CBDT Circular No.11 of 2001, dated 23/07/2001, which does not permit reopening of concluded assessments. We notice that in the case of that assessee, the assessment for 1997-98 was taken up in first appeal and the appellate authority set aside the assessment and remanded the matter for reconsideration by the Assessing Officer on certain other issues. While the assessment remained set aside and remanded by the CIT (Appeals), the Commissioner in exercise of suo motu revisional powers under Section 263 issued notice to the assessee and directed revision of assessment for the purpose of making disallowance under Section 14A of the Act. In this context, we held that when assessment stands set aside and remanded for reconsideration by the assessing authority, such assessment cannot be treated as a concluded assessment and so much so, the Circular referred to therein does not bar revision of assessment by the Commissioner under Section 263 of the Act for the purpose of making disallowance under Section 14A. In fact, the scope of the proviso to Section 14A was not considered in the said decision at all. Obviously, the facts arising in these cases are not similar to the facts based on which we rendered our judgment in the above case because in all these cases, assessment involved remained concluded and the powers of the Commissioner to suomotu order revision of assessment under Section 263 was considered with specific reference to the proviso to Section 14A, which is part of the statute.

4. So far as the decision on merit in these cases is concerned, we have only followed judgment of the Division Bench this Court in I.T.A.No.587/2009 dated 14/01/2010 wherein this Court clearly held that if the Revenue's claim is allowed, then the prohibition under the proviso against the Assessing Officer to revise concluded assessments for making disallowance under Section 14A can be neutralised and defeated by referring concluded assessments to the Commissioner for initiating suomotu revisional power under Section 263 of the Act. In other words, we felt that the proviso is not procedural but guarantees vested rights of parties against reopening concluded assessments. So far as concluded assessments are concerned, the proviso makes it clear that the assessee should not be subjected to disallowance either by reopening assessment under Section 147 or under Section 154 for raising demand of tax after disallowance or for withdrawing refund granted. If the right of the assessee cannot be taken away by the Assessing Officer, we see no reason why it can be permitted to be done by the Commissioner under Section 263 to achieve the same purpose, which is prohibited under the proviso to Section 14A. We therefore do not find any mistake in the judgment warranting interference in review. Consequently, these review petitions are dismissed.

Registry will attach a copy of the judgment in ITA No.587/2009 dated 14/01/2010 to form part of this judgment.