CITICORP FINANCE (I) LTD,MUMBAI vs. ASST CIT RG 10(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act)

3610-11, 3612/11,C.O-148/11-CITICORP of the Act.The assessee moved an application u/s.254(2)before the Tribunal and vide its order dated 16/08/2007,the application was disposed.In pursuance of the order of the Tribunal, the AO completed the assessment u/s.143 (3) read with section 254 of the Act,on 02/12/ 2008,determining the income of the assessee at Rs. 23.30 Crores. The assessee preferred an appeal before the First Appellate Authority (FAA), who partly allowed the appeal filed by the assessee.On 17/02/2009,the AO passed rectification order u/s.154 of the Act,determining the income of the assessee at Rs. 46.07Crores for the year under consideration.The assessee challenged the rectification order before the FAA,who held that the appeal filed by the assessee was infructuous.

3.After considering submission of the assessee,the FAA held that the AO had filed an appeal before the Tribunal on two grounds i.e. directing to allow deduction of Rs.1.94 Crores on account of provision for accrued expenses and (ii) directing to allow exemption u/s.10(33) in respect of hold dividend income of Rs. 4.85Crores, that the second ground of appeal before the Tribunal was in respect of disallowance of expenses of Rs. 3.68 Crores made by the AO u/s.14A of the Act, that the FAA had held that no expenses were incurred for the purpose of earning of exempt income,that there were two issues before the Tribunal with regard to disallowance made u/s.14A,that the first issue was whether any expenses were incurred for the purpose of earning exempt income, that the second issue was that if such expenses were incurred how much of the ground of appeal was decided by the Tribunal against the assessee,that Tribunal had set aside the issue of quantification of expenses incurred to the file of the AO, that the Tribunal had not disturbed its decision with regard to first limb of the ground, that the Tribunal had held that argument of the assessee could not be accepted that one could earn substantial dividend income without incurring any expenses,that the Tribunal had not disturbed the finding given by it in the original order with regard to earning exempt income without incurring expenditure,that the Tribunal had directed the AO to consider the submission of the assessee with regard to retroactive nature of subsection (2) and (3) of section 14A of the Act, that the argument advanced by the assessee was not correct that the entire order had been set aside by the Tribunal for fresh education,that in the case under consideration the entire assessment was not set aside by the Tribunal,that the provisions of section 153(2A) were not applicable,that no period of limitation was prescribed u/s.153(3)(ii) of the Act,that the order passed by the AO on 02/12/2008,u/s.143 (3) r.w.s.254 was not barred by limitation.

3610-11, 3612/11,C.O-148/11-CITICORP 3.1.With regard to the disallowance made by the AO under the head interest expenditure, amounting to Rs. 23.20 Crores,the FAA held that the provisions of Rule 8D of the Income Tax Rules,1962(Rules),were not applicable for the year under consideration,that the provisions provided a reasonable method and the basis for the AY.2008-09 and subsequent years, that the ends of justice will be met if the interest expenditure of Rs.4 Crores was held to be attributable to making investment in shares yielding exempt income which is disallow - ing u/s.14A(1) of the Act,that the interest is expenditure had been considered giving credit to the huge amount available to the assessee in form of dividend on profit on sale of investment during the year and possibility of utilising capital partly for investment in shares. In respect of admitted to and managerial expenses, the FAA held that the assessee’s argument was not acceptable that no expenditure was incurred at all for the purpose of earning exempt income, that administrative expenses to be incurred on the investment activities depended on the number of scripts held quantity of shares in each script sold in purchase, that a perusal of the balance sheet showed the there were investments in subsidy companies as well as in other companies,that there were investment in only to subsidiary companies and other fifteen entities,that the number of scripts held was not very large, that the assessee had argued that maximum disallowance in that regard could be made of Rs.6.31 lakhs only,that considering the volume of investment movement in shares the argument of the assessee was not acceptable.He held that the ends of justice will be met if an expenditure of Rs.20 lakhs was considered as a substitute and managerial expenses incurred for the purpose of making entertaining investment yielding exempt income.Thus,he upheld the addition of Rs. 4.20 Crores and partly allowed the appeal filed by the assessee.

4.During the course of hearing before us, the Authorised Representative (AR) argued that the order passed by the AO in pursuance of the order of the Tribunal was barred by limitation and was bad in law,that the FAA enhanced the disallowance u/s.14A without following the due process of law as laid down in section 251 (2) of the Act,that he did not provide the assessee a reasonable opportunity of hearing before an enhancement,no disallowance u/s.14A could be made where there was no exempt income,that under the said section no disallowance on strategic investment(including subsidy investment)could be made,that the assessee had sufficient own fund(share capital and reserve some surpluses) covering the investments made and hence disallowance u/s.14 A was not warranted. He referred to the page number 175-176, 180, 170-172 of the paper book. He also refer to the FIPB approval (pages 1-14 of the paper book) in that regard arguing that investments in the subsidies were 3

3610-11, 3612/11,C.O-148/11-CITICORP made after specific amounts were received as capital by the assessee as per the direction of the FIPB.The Departmental Representative (DR) argued that order passed by the AO was not time-barred, that the Tribunal had given only directions,that the FAA had rightly made disallowance under the head administrative and managerial expenses. With regard to the interest expenditure, he supported the order of the AO.

5.We have heard the rival submissions and perused the material before us. We have narrated the basic facts of the case in the earlier part of our order. In our opinion,it would be fair to decide the issue of jurisdiction before deciding the merits of the case.The basic issue to be decided is as to which sub-section of the section 153 would be applicable to the case under consideration. 5.1.Before proceeding further,we would like to refer to case of Instruments and Control Co. (349 ITR 571) of the Hon’ble Gujarat High Court wherein the issue of time limit has been dealt at length.Facts of the case were that the assessee -company had filed its return of income declaring a total income of Rs. 2,09,106/-that the return was taken in scrutiny,that the AO framed scrutiny assessment on 31.03.1989, determining a total income of the assessee at Rs. 13,22,030/-,that the AO had questioned two separate amounts of commission paid by the petitioner to two different agencies and claimed deduction thereof from its total income,that he held that a sum of Rs. 9,27,672/-paid by way of commission to one person and a sum of Rs.1,85,000/- paid by way of service charges to the other person should be disallowed,that matter travelled up to the Tribunal and the issue was remanded back to the file of the AO. While doing so,the Tribunal passed the following order : "3.Upon going through the material on record and keeping in mind the submissions made before us by the assessee's counsel, we deem it fit and proper in order to do substantial justice to the asses see, we remit the matter to the file of the AO with a direction to summon those two parties again and allow the assessee an opportunity to cross-examine them so that the true facts emerge in relation to the payment of commission by the assessee-company to those two persons. However, on remand the AO shall be at liberty to probe into the matter further by way of inquiry and investigation into the alleged payment of commission to the two parties aggregating to nearly Rs. 11.27 lakhs (approximately).We order and direct accordingly." In the meanwhile,the AO imposed penalties upon the petitioner,u/s.271(1)(c)and 273(2)(aa) of the Act.The FAA deleted both the penalties.These orders were passed on the premise that the Tribunal had set aside the assessment order itself with a direction to the AO to pass a 3610-11, 3612/11,C.O-148/11-CITICORP fresh assessment.The FAA,while cancelling the penalties, granted liberty to the AO to initiate fresh proceedings for penalty in the fresh assessment order, if situation so warranted.Though the Tribunal had remanded the proceedings to the AO vide its order 05.07.1994, yet for a long time thereafter, the AO did not take any steps in that regard.The assessee approached the CIT in the year 2001 to grant him refund and interest.It made further representations, but the AO did not take any action.The assessee filed a writ petition before the Hon’ble High Court for grant of refund.The AO initiated assessment proceedings as per the directions of the Tribunal.The assessee moved an amendment praying for necessary direction to set aside such assessment proceedings as time barred.It produced a communica - tion of 11.07.2000, issued by the Assistant Registrar of the Tribunal certifying that the Tribunal's order was served on the assessee on 03.08.1994 and also served by hand in the office of the CIT on the same day.The question to be answered by the Court was as to whether the assessment proceedings for the AY.1988-89 could be processed by the AO or that the same should be declared as having abated as time-barred. After referring to the provisions of section 153 of the Act,the Hon’ble Court held as under: “16.3 We may notice that sub-section (2A) of section 153 was intro duced by way of amendment by the Amendment Act, 1970, with effect from April 1, 1971. Correspondingly, the words "subject to the provisions of sub-section (2A)" were also added in sub-section (3) of section 153.

18. Prior to the introduction of sub-section (2A) of section 153 of the Act, it may have been open for the Revenue to contend that all cases of assessments, reassessments or re- computations made in the case of the assessee or any person in consequence of or to give effect to any finding or direction of the appellate orders passed in consequences mentioned in clause (ii) thereof, would not be governed by the limitation provided in sub-section (1) and 3610-11, 3612/11,C.O-148/11-CITICORP sub-section (2) and in such cases, such assessment, reassessment or recomputation, as the case may be, could be completed at any time.

3610-11, 3612/11,C.O-148/11-CITICORP of section 153 of the Act and would also not be hindered by the prescription of limitation u/s.(2A) of section 153 of the Act. 23.We may notice that the Delhi High Court in the case of CIT v. Bhan Textile P. Ltd. [2008] 300 ITR 176 (Delhi) also adopted a similar view. The High Court held as under (page 180) : "In so far as the applicability of section 153(3)(ii) of the Act is concerned, that relates to giving effect to a finding or direction, inter alia, by the Commissioner of Income- tax (Appeals). What this means is that the Assessing Officer must comply with the finding or direction given by the appellate authority without necessarily disturbing the assessment order. In so far as the present case is concerned, that is not the position because the Assessing Officer was directed by the Commissioner of Income-tax (Appeals)to pass a fresh order u/s.144 of the Act meaning thereby that the assessment order to the extent that it is covered by ground No. 2 of the appeal filed by the assessee was set aside or cancelled. There was no independent finding or direction which the Assessing Officer was required to comply with on the basis that the core of the assessment order has been sustained by the Commissioner of Income-tax (Appeals)."

3610-11, 3612/11,C.O-148/11-CITICORP was necessary on account of an order passed by the Tribunal u/s.254 of the Act cancelling the assessment framed by the Assessing Officer.The period of limitation prescribed in section 153(2A),therefore,would apply.While such an order was served on the Commissioner on August 3, 1994, within a period of two years of the end of such financial year, a fresh order of assessment had to be passed by the Assessing Officer.The same not having been done, in our view, such proceedings have become time-barred. The assessment placed before the Assessing Officer by the Tribunal's order, therefore, must be treated as having abated. In that view of the matter, the declaration prayed for by the petitioner must be granted. 26.In the result,the petition is allowed.The assessment proceedings for the assessment year 1988-89 in the case of the present assessee is declared to have abated as having become time- barred…..” 5.2.Now,we would like to reproduce the order of the Tribunal,disposing the MA on 16/ 08/ 2007(supra) and it reads as under: “5.We have heard the parties.Perusal of the record shows that both the parties were heard before disposal of the appeal. They were allowed to make their submissions and their submissions have been duly incorporated in the order passed by this Tribunal. Thus it is not a case where the Tribunal has passed the order without hearing the parties to the appeal filed by the Department. In fact, both the parties were heard before the Tribunal passed the order. The grievance of the assessee however is that the judgements and decisions referred to in the order of the Tribunal were not put to the ld. Counsel for the assessee at the time of hearing of the appeal. We have already extracted and reproduced the operative part of the Tribunal’s order earlier in this Order, which shows that the matter has been restored to the file of the Assessing Officer for a fresh decision. We consider it appropriate to direct the Assessing Officer to consider the submissions of the assessee with regard to retroactive nature of subsection (2) and (3) of section 14 A also and decide upon the issue. The assessee shall be free to make it submission before the Assessing Officer. This course of action will ensure that the Assessing Officer also gets an opportunity to consider them on merits and record his finding thereon. In this view of the matter paragraphs 17 and 18 of the Tribunal’s order dated 21/11/2006 are substituted by the following paragraphs: “17. Both the Departmental authorities, namely, the Assessing Officer and the ld. CIT (A) have not considered the implications of the provisions of sub-section (2) and (three) of section 14 A of the I-T Act. It is therefore considered appropriate to restore the matter to the file of the Assessing Officer for deciding as to whether the provisions of subsection (2) and (3) of section 14 A are procedural in nature, retroactive in operation and therefore apply to all the pending matters. If a horse that the provisions of sub-section (2) and (3) of section 14 A are procedural in nature and 3610-11, 3612/11,C.O-148/11-CITICORP therefore will apply to all the pending matter, he is directed to recompute the disallowance u/s.14 A in accordance with law.

6.After going through the above order,we are of the opinion that the Tribunal had restored the matter to the file of the AO for a ‘fresh decision’. It was not a case of simple direction to the AO,wherein he has to give appeal effect only.If the Tribunal directs the Revenue Authorities to verify certain facts like arithmetic calculations or to decide a particular ground of appeal that remained to be adjudicated, it can safely be said that the time limit prescribed by the section 153(2A) of the Act would not be applicable.But,in a case like this, where the AO had to not only decide the applicability of certain sections,but also had to decide the nature of the sections,would be covered by the provisions of 153(2A) of the Act. The Tribunal had directed the AO to decide as to whether the sub-sections (2) and (3) of subsection 14A of the Act were retroactive in operation.Thus,it was a case of fresh adjudica - tion.Therefore,in our opinion,the FAA was not justified in holding that the provisions of section 153(3)(iii) were applicable to the case under consideration. Reversing his order, we hold that the order passed by the AO was not valid and was barred by time-limit as prescribed by the provisions of section with 153(2A) of the Act.First ground of appeal, raised by the assessee,is decided in its favour.As we have held that order of the AO was not a valid order, therefore,we are not deciding the merits of the case.

As the order of the AO has been held to be an invalid order,therefore, all the three matters (Appeal by the AO, appeal filed by the assessee with regard to the order passed u/s.154 of the Act and the CO filed by the assessee) become infructuous.