THE COMMISSIONER OF INCOME TAX,COCHIN vs. M/S.VEEPEES ENTERPRISES,ERNAKULAM

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ITA/21/2003HC KeralaKLHC01020373200316 June 2008Bench: HONOURABLE MR.JUSTICE V.K.MOHANAN,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR5 pages
AI SummaryRemanded

What did the High Court hold?

The High Court held that the Tribunal had interfered with the Commissioner's Section 263 order without conclusively deciding on merits whether the assessee was entitled to reckon depreciation in the computation of capital gains on the sale of the theatre building under Section 50 of the Income Tax Act. The Tribunal's reasoning that in view of divergent High Court views, the assessee was entitled to the view favourable to it was found to be unjustified. The Court noted that prima facie, depreciation can be reckoned under Section 50 only if it was allowed under the Act, and the Revenue's case was that returns were not filed, thus no depreciation was allowed. The Court found no justification for the Tribunal to interfere with the Section 263 order solely based on differing High Court opinions. Consequently, the High Court set aside the order of the Tribunal and remanded the matter back to the assessing officer for completion of assessment pursuant to the Commissioner's Section 263 order. The assessee was granted liberty to place full facts and raise all contentions on merit, and the Commissioner's findings were to be treated as mere opinions. The assessing officer was directed to decide objectively.

What were the facts?

The Revenue (Commissioner of Income Tax, Cochin) filed an appeal against an order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench. The ITAT had vacated a suo motu revisional order passed by the Commissioner under Section 263 of the Income Tax Act, 1961, directing a revision of the respondent-assessee's (M/s. Veepees Enterprises) assessment for the assessment year 1996-97. The Commissioner had reopened the assessment on three grounds: (1) depreciation on the theatre building should not be reckoned in capital gains computation on sale, as returns were not filed for several years; (2) deduction of retrenchment compensation allowance was irregular; and (3) capital gains were short-assessed by Rs. 5 lakhs. The ITAT reversed the Commissioner's order, leading to the Revenue's appeal.

What were the issues?

1. Whether the Tribunal erred in vacating the Commissioner's Section 263 order by holding that the assessee was entitled to the benefit of the doubt due to divergent High Court views on reckoning depreciation in capital gains computation under Section 50 of the Income Tax Act, without deciding the issue on merits. Assessee's Contention: The assessee claimed ignorance of non-filing of returns for certain assessment years (1985-86 to 1989-90) due to files being with an estranged partner. The assessee relied on the Punjab and Haryana High Court decision in CIT v. Haryana Hotels Ltd. (2005) 276 ITR 521. Revenue's Contention: The Revenue argued that depreciation could only be reckoned if it was allowed under the Act, and in this case, returns were not filed for several years, preventing any allowance of depreciation. The Revenue relied on the Madras High Court decision in Sri. Rajarathinam Transports Pvt. Ltd. v. Commissioner of Income-Tax (1993) 199 ITR 203. The Revenue contended that the Tribunal should not have interfered with the Section 263 order merely due to differing High Court views.

Which sections of the Income-tax Act were involved?

Section 263,Section 50

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN MONDAY, THE 16TH JUNE 2008 / 26TH JYAISHTA 1930 ITA.No. 21 of 2003() -------------------- ITA.125/COCH/2001 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT ------------------------------------ THE COMMISSIONER OF INCOME TAX, COCHIN BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENTS: RESPONDENT ----------------------- M/S. VEEPEES ENTERPRISES, NARAKKAL, KOCHI-11. BY ADV. SRI.K.R.SUDHAKARAN PILLAI SRI.SAJITH KUMAR V. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 16/06/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. .................................................................... I.T. Appeal No.21 of 2003 .................................................................... Dated this the 16th day of June, 2008. JUDGMENT Ramachandran Nair, J. This appeal is filed by the Revenue against Annexure-C order of the Tribunal vacating suo motu revisional order passed by the Commissioner under Section 263 of the Income Tax Act directing revision of respondent's assessment for the year 1996-97. The assessment originally completed was reopened on three grounds. In the first place, the Commissioner noticed that since assessee had not filed returns or claimed depreciation for the theatre building for several years, depreciation should not be reckoned in the computation of capital gains on the sale of the theatre building. Similarly, deduction of retrenchment compensation allowance granted by the officer on closure of business in the threatre was found to be irregular by the Commissioner. The third ground on which reopening is made is on account of short-assessment of capital gains in as much as the sale proceeds taken was less by Rs.5 lakhs. On appeal by the assessee, the Tribunal reversed the order of the Commissioner against which this appeal is filed by the Revenue. We have heard Senior counsel appearing for the department

2 and Sri.K.R.Sudhakaran Pillai appearing for the respondent-assessee. 2. We find from the order of the Tribunal that they have interfered with the Commissioner's order without conclusively deciding on merit that assessee is entitled to reckon depreciation in the computation of capital gains on sale of theatre building under Section 50 of the Income Tax Act. They have considered the divergent views expressed by various High Courts and held that in view of the difference of opinion, the assessee is entitled to the view favourable to it. We do not think we should consider the findings of the Tribunal on other issues because order of the Tribunal is liable to be interfered with on this ground alone. Prima facie depreciation can be reckoned in the computation of capital gains under Section 50 of the Act only if it was allowed as provided under the provisions of the Act. The department's case is that returns were not filed by the assessee and consequently there was no occasion to allow any depreciation for the assessment years 1985-86 to 1989-90. So far as assessments for the years 1983-84 and 1984-85 are concerned, assessment is stated to be made on estimated income of Rs.16,000/- for each year. Against these findings made by the Commissioner, the assessee pretended ignorance on the non- filing of returns on the ground that files were with the estranged partner. While counsel for the appellant has relied on decision of the Madras High

3 Court in SRI.RAJARATHINAM TRANSPORTS PVT. LTD. V. COMMISSIONER OF INCOME-TAX (1993) 199 ITR 203, counsel for the assessee has relied on decision of the Punjab and Hariana High Court in COMMISSIONER OF INCOME-TAX V. HARYANA HOTELS LTD. (2005) 276 ITR 521. The issue is not admittedly covered by decision of the Supreme Court or that of this court. We do not find any justification for the Tribunal to interfere with Section 263 order merely because different High Courts have taken different views in the matter. If the findings entered by the Commissioner are right, then he was justified in interfering with the assessment under Section 263 of the Act. Therefore, the Tribunal could not have interfered with the order of the Commissioner except on merits. Since Tribunal has not considered the issue on merits, we set aside the order of the Tribunal and remand the matter back to the officer for completion of assessment pursuant to Section 263 order of the Commissioner. However, we make it very clear that the assessee will be free to place full facts and raise all contentions on merit and the findings if any recorded by the Commissioner in the order under Section 263 should be treated as only opinion or observations by him which assessee is free to contest in regular assessments. The officer is directed to take decision objectively without being influenced by the Commissioner's order, but on

4 all the issues stated by him in Section 263 order. Since we have given freedom to the assessee to raise objection on all issues on merits, the assessee can file appeal against regular assessment on merits. The appeal is allowed by setting aside the order of the Tribunal, but subject to the above terms.

C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms

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