THE COMMISSIONER OF INCOME TAX vs. M/S.LORD KRISHNA BANK LTD

Insofar as ITA 348/09 is concerned, among the four issues that were raised before the Tribunal, three issues are in respect of loss on account of revaluation of investment in Government securities, disallowance of expenditure for issue of bonds and broken interest. These questions have already been considered by this court and answered against the Revenue. Issue No.1 and 3 are covered by the judgment in Commissioner of Income Tax v. Nedungadi Bank Limited [264 ITR 545] of this court and the issue No.2 concerning disallowance of expenditure for issue of : 2 : bonds is covered by the judgment of the Apex Court in India Cements Limited v. Commissioner of Income Tax (1996) 60 ITR

The fourth issue was regarding the applicability of Section 14A of the Income Tax Act which was introduced by the Finance Act 2001 with effect from 1.4.1962. We find that the assessment order for the assessment year 1998-1999 was passed on 23.2.2001 disallowing Rs.1,50,000/- being the proportionate operation expenses. The Commissioner of Income Tax (Appeals) confirmed the disallowance but directed the Assessing Officer to consider disallowance of Rs.2,61,06,277/- under Section 14A of the Income Tax Act. In ITA 299/02, the Tribunal upheld the order of the 1st Appellate Authority. Against the order of the Tribunal, the assessee filed ITA 14/02. By judgment dated 3rd October 2005, the appeal was disposed of by this court, holding that the impact of Section 14A and the proviso were not considered by the authorities below and the Tribunal and on that basis, the order of the Tribunal was : 3 : set aside and the matter was remitted to the Tribunal for fresh consideration. Accordingly, the matter was reconsidered and the Tribunal passed Annexure E order in ITA 1264/09 where the Tribunal took the view that Section 14A was not applicable as the business was indivisible. It is this order that is challenged by the Revenue in ITA 1264/09 and question of law framed for the consideration of this court read as under:

Having heard the Standing Counsel for the Revenue and the learned Senior Counsel for the assessee, we find that these questions are already answered in the judgments rendered by this court and, therefore, should be answered against the Revenue. In the judgment in Commissioner of Income Tax v. Dhanalakshmy Bank Limited [(2012) 344 ITR 259], while discussing the scope of Section 14A and the proviso thereto this court, inter alia, held thus: “In other words, assessments for any assessment year up to the assessment year 2000-2001 that were finalised when the proviso was introduced without making any disallowance under Section 14A, were allowed to achieve finality. Disallowance under Section 14A was intended to be made only for pending assessments and for assessments for for the assessment years commencing from 2001-2002 onwards.”

However, this judgment was sought to be distinguished by the learned Standing Counsel appearing for the Revenue by contending that the proviso only fetters on the powers of the Assessing Officer. As rightly pointed out by the learned Senior : 5 : Counsel for the assessee that contention was also raised by the Revenue and the same has been negatived by this court in the judgment reported in The Commissioner of Income Tax, Thrissur v. Paul John [2010 (1) KLJ 297]. “It is clear from the above proviso that even though the scheme of disallowance of expenditure incurred by the assessee in relation to income exempted under the Act is introduced with retrospective effect from 1.4.1962, Parliament has chosen to implement the provision only from the assessment year 2001-02 because express prohibition is introduced in the proviso against assessing officers reopening or rectifying assessments under Section 147 or under Section 154 for withdrawing deduction allowed in assessments concluded for periods prior to 1.4.2001. The contention of the standing counsel is that prohibition introduced in the proviso is only against assessing officers from exercising their powers under Sections 147 and 154 of the Act and since there is no restriction against Commissioner's power under Section 263 he is free to invoke the same and disallow it, consistent with the express provision contained in Section 14A, within the period of limitation provided therein. Senior counsel appearing for the respondent- assessee on the other hand contended that the prohibition in the proviso is against reopening of concluded assessments for periods prior to 1.4.2001 and even though Commissioner's authority under : 6 : Section 263 is not expressly provided therein, the bar under the proviso applies to him as well. We are of the view that the proviso to Section 14A is intended to provide finality for concluded assessments where deductions for earning exempted income would have been allowed and therefore unless the proviso applies to Commissioner of Income tax as well, the purpose of the proviso will be defeated. Further, in our view, the bar against the assessing officer passing an order enhancing the assessment stated in the proviso takes in an order which the Officer may have to pass pursuant to the direction issued by the Commissioner under Section 263. Even though standing counsel submitted that the proviso is applicable only to proceedings that can be issued by the assessing officer under Sections 147 and 154, we feel besides the powers of the Officer under Sections 147 & 154, the assessing officer has the authority to increase the liability of the assessee pursuant to orders issued under Section 263 by the Commissioner and pursuant to orders of enhancement which the Commissioner of Income Tax (Appeals) can issue under Section 251(1) (a) while deciding the appeal tiled by the assessee. We