Commissioner Of Income Tax vs M/S. Nalwa Investments Ltd.
2011 Latest Caselaw 2529 Del

                           REPORTABLE
*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                              ITA No.270 of 2010
                                     with
                             ITA No.1345 of 2010

                                             Reserved On: March 31, 2011.
%                                          Pronounced On: May 11, 2011.

    1) ITA No.270 of 2010

       COMMISSIONER OF INCOME TAX                              . . . Appellant

                             through :          Mr. Anupam Tripathi,         Sr.
                                                Standing Counsel.

                                     VERSUS

       M/s. NALWA INVESTMENTS LTD.                            . . .Respondent

                             through:           Mr. Ajay Vohra with Ms. Kavita
                                                Jha, Advocates.


    2) ITA No.1345 of 2010

       COMMISSIONER OF INCOME TAX                              . . . Appellant

                             through :          Mr. Abhishek Maratha,        Sr.
                                                Standing Counsel.

                                     VERSUS

       M/s. NALWA INVESTMENTS LTD.                            . . .Respondent

                             through:           Mr. Ajay Vohra with Ms. Kavita
                                                Jha, Advocates.


CORAM :-
    HON'BLE MR. JUSTICE A.K. SIKRI
    HON'BLE MR. JUSTICE M.L. MEHTA

       1.     Whether Reporters of Local newspapers may be allowed
              to see the Judgment?

       2.     To be referred to the Reporter or not?


ITA No.270 of 2010 & ITA No.1345 of 2010                          Page 1 of 16
        3.     Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J.

ITA No.270 of 2010

1. The assessment order passed by the Assessing Officer (AO) in

respect of Assessment Year 2003-04 was tinkered with by the

Commissioner of Income Tax (CIT) in exercise of its powers

under Section 263 of the Income Tax Act (hereinafter referred

to as „the Act‟). The CIT was of the opinion that the AO had not

done his job properly while making the assessment inasmuch

as in respect of certain items, the AO did not bestow any

consideration or applied his mind leading to escapement of

income. He, thus, restored the matter back to the file of AO for

deciding the said issue afresh. This order of the CIT passed

under Section 263 of the Act was successfully challenged by

the assessee before the Income Tax Appellate Tribunal („the

Tribunal‟ for brevity), which has, by reason of impugned orders

dated 26.03.2009, set aside the order of the CIT. It is this

impugned order of the Tribunal, which is the subject matter of

appeal No.270 of 2010 and has given rise to the following

substantial question of law:

Whether the Tribunal was justified in setting aside the

orders of the CIT passed under Section 263 of the Income

Tax Act on the purported ground that the view taken by

the Assessing Office in the scrutiny assessment was a

plausible view?

2. We have accordingly heard the arguments on the aforesaid

issue and proceed to decide the same. The issue which is

involved in this appeal is limited to the treatment which has

been given to the dividend income earned by the assessee in

the relevant assessment year. Though it is treated as „income

from other sources‟, the dispute is as to whether the assessee

is justified in claiming set off of brought forward losses of

previous years against this dividend income giving it the

character of „business income‟ even though assessed as

income from other sources. The moot question is as to whether

the AO while allowing the aforesaid set off had considered this

aspect or the CIT was justified in passing the orders under

Section 263 of the Act on the premise that the issue was not

appropriately dealt with by the AO. Before we deal with the

nuances of this issue, it would be necessary to take note of the

background under which the issue has cropped up.

3. The assessee is a non-banking company registered with the

Reserve Bank of India and is engaged in the business of

investment in shares, securities, other debt instruments and

financing loans and providing guarantees. In the relevant

assessment year, it had mentioned dividend income of

`44,51,317/- which had been shown as business income. The

AO, however, found that in previous years, it was treated as

income from other sources, instead of business income. He,

thus, accorded the same treatment in this year as well holding

it to be income from other sources under Section 56 of the Act.

At the same time, while computing the income of the assessee,

the AO allowed business losses of the earlier years to be set off

against this dividend income as well.

4. On perusal of the assessment record, the Commissioner of

Income Tax noticed that the AO had wrongly allowed the set off

of the brought forward losses against this income, which was

not the income from business but the income from other

sources. He observed that the provisions for carry forward and

set off of business are provided under Section 72(1) of the Act

which provides that losses of business and profession can be

carried forward and set off against the profit from business and

profession in the subsequent year and cannot be set off against

the subsequent incomes falling under the head 'Income from

Other Sources'. He, thus, was of the opinion that allowing the

set off of brought forward business loss to the extent of

`44,51,317/- had resulted in the assessment which was

erroneous and prejudicial to the interest of Revenue. Show

cause notice was given to the assessee, who filed its reply

contending that the assessee was engaged in the business of

investment and was holding the shares of other companies of

the same group. Investment was meant for control and

management of investee companies. The shares constituted

the business asset of the company and dividend earned from

such investment was in nature of 'business income' and this

income was eligible for set off against the brought forward

business losses. After considering this response, the order was

passed restoring the matter back to the file of the AO for the

following reasons:

"7. I have considered the contention of the Assessee and also gone through the various judgments cited by the assessee. Ratio of the judgments is applicable to the cases where examination of the facts established that purchase of shares was with intention to keep them as stock-in-trade. In the cases where intention at the time of purchase of share was to make long-term investments, the ratio would not apply. In the case of Assessee Company, the Assessing Officer has failed to examine this crucial aspect as to what the nature of investments on which dividend was earned. As discussed in the preceding para, prima- facie, the investments were held as long-term investment and no part of the investment was considered stock-in-trade by the Assessee. Therefore, the Assessing Officer had failed to conduct the required enquiry and also had failed in application of the provisions of Section 72 (1) of the I.T. Act. This rendered order passed by the AO erroneous inasmuch as prejudicial to the interest of Revenue to that extent. In the case of M/s. Gee Vee Enterprises 99 ITR 375, the jurisdictional High Court has categorically held that failure of the Assessing Officer to conduct the required enquiry and accepting the statement of the assessee without due verification renders the order erroneous inasmuch as prejudicial to the interest of revenue.

In a more recent judgment rendered by the Allahabad High Court in the case of Jagdish Kumar Gulati Vs. CIT 269 ITR 71, the Hon‟ble Court considering various judicial pronouncements passed earlier viz. Duggal & Co. 220 ITR 456 (Delhi) K.A. Ramaswami Chettial 220 ITR 657 (Mad.) etc. held that absence of proper enquiry in a matter renders an order erroneous

as well as prejudicial to the interest of the revenue. In view of above, assessment order is held to be erroneous insofar as prejudicial to the interest of revenue to the extent of allowing set off of brought forward business losses against the dividend income without examination of facts and proper enquiries.

In view of the above, the issue of determining the nature of investment and assesses ability of dividend income and its set off with the brought forward business losses is restored back to the file of AO for deciding the issue afresh."

5. The Tribunal while quashing the aforesaid order of the CIT

examined the nature of the dividend income earned by the

assessee and on application of certain case laws came to the

conclusion that the said income could be treated as business

income as dividend was earned from the shares and securities

held in the other companies in the same group. The view of

the AO was, therefore, a plausible view and it could not be said

that the AO had not applied his mind. Relevant portion of the

order of the Tribunal, which discussed this aspect is reproduced

below:

"The CIT has held that the assessment order is erroneous insofar as prejudicial to the interest f revenue to the extent of allowing set off of brought forward of business losses against the dividend income without examination of facts and proper enquiry. it is further noticed that the Hon‟ble Supreme Court in the case of Distributors (Baroda Pvt., referred to supra has categorically held that the investment made by the assessee company in the shares in the managed company are essentially linked with its managing agency business. It is noticed that in the assessee‟s case also, the assessee company has invested in the shares of the group companies in which it was holding a management control. Thus, obviously the income there from could only be from its business of managing agency. The principle as laid down by the Hon‟ble Supreme Court in the case of Distributors (Baroda),

referred to supra though the decision is in relation to the Income-tax Act, 1922 would apply in all force in relation to the Income-tax Act, 1961. A principle laid down by the Hon‟ble Supreme Court is to be followed and if this principle is applied to the facts of the present case, it is noticed that the view as taken by the AO in the scrutiny assessment is a plausible view. Further, it cannot be said that the AO has not applied his mind. This being so, we are of the view that the order of the CIT is bad in law insofar as the view taken by the AO is a plausible view. In the circumstances, the order of the CIT as passed u/s 263 on 07.03.2008 in the case of this assessee for AY 2003-04 is quashed."

6. The neat submission of the learned counsels for the Revenue is

that the entire approach of the Tribunal was erroneous

inasmuch as it discussed the matter from a wrong angle and

thus, arrived at wrong conclusion. In this behalf, it was

submitted that the AO had himself accepted the dividend

income as income from other sources. However, without

discussing as to whether it could assume the character of

business income of the assessee, the AO allowed the set off of

the carry forward business losses of previous year against this

dividend income. No exercise was done by the AO as to

whether such an income could be given the character of

business income and therefore, the CIT was right in restoring

the matter back to the AO.

7. Mr. Ajay Vohra, learned counsel appearing for the assessee, on

the other hand, made a fervent plea that no doubt the income

was to be assessed under the head „Income from Other

Sources‟, but at the same time for the purposes of set off, it

was permissible for the authorities to see the inherent

character of the said income, which was business income. He

referred to the following judgments in support of his

arguments:

(i) Commissioner of Income Tax Vs. Chugandas & Co. 55 ITR 17 (SC);

(ii) Commissioner of Income Tax Vs. Cocanada Radhaswami Bank Ltd. 57 ITR 306 (SC);

(iii) Commissioner of Income Tax Vs. Excellent Commercial Enterprises and Investment Ltd.

                       282 ITR 423

              (iv)     Commissioner    of     Income     Tax    Vs.

Amalgamations (P) Limited 226 ITR 188 (SC)

Mr. Vohra also invoked the principles of consistency and

referred to certain judgments in support of his submission.

8. We have considered the rival submission. It is an admitted fact

that the assessee is a non-banking finance company engaged

in the business of investment in shares, securities, other debt

instruments and financing loans and providing guarantees. The

income of the assessee comprises of receipts from interest on

loans and securities, professional income as well as dividend

income and entire income was shown under the head „Income

from Business and Profession‟, by the assessee. The CIT

observed that the balance sheet of the assessee company

shows that all the investments in shares of bodies corporate

was grouped as long-term investment and no part of

investment had been considered stock-in-trade and was not

grouped as part of current assets. Section 14 of the Act

stipulates different heads under which income is to be

assessed. Dividend income is assessable under the head

„Income from other sources‟. This is the mandate of Section 56

(2) of the Act which reads as under:

Section 56 (2): In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes shall be chargeable to income-tax under the head "Income from other sources", namely :-

(i) Dividends;

(ia) Income referred to in sub-clause (viii) of clause (24) of section 2;

(ib) Income referred to in sub-clause (ix) of clause (24) of section 2;

(ic) Income referred to in sub-clause (x) of clause (24) of section 2, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession";

(id) Income by way of interest on securities, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession";

(ii) Income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession";

(iii) Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or profession";

(iv) Income referred to in sub-clause (xi) of clause (24) of section 2, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession" or under the head "Salaries".

9. This position is not disputed. However, the argument of Mr.

Vohra was that even if under the scheme of the Act, the

dividend income is to be charged under the head „Income from

other sources‟, the character of that income could still be

looked into and it could be treated as business income for the

purpose of set off. Mr. Vohra is right to this extent.

10. In Chugandas & Co. (supra), the Supreme Court held that

the heads of income were intended merely to indicate the

classes of income. These heads do not exhaustively delimit

sources from which income arises. Business income is broken

up under different heads only for the purpose of computation of

the total income. By that breaking up, the income does not

cease to be the income of the business, the different heads of

income being only the classification prescribed by the Income-

tax Act for computation. This principle was repeated by the

Supreme Court in Cocanada Radhaswami Bank Ltd.

(supra). In that case, the facts situation was somewhat

similar. The assessee had earned some interest income on the

securities and the brought forward loss was sought to be set off

against the income even computed under the head „interest on

securities‟. The Court opined that the assessee was entitled to

set off the loss brought forward against the entire income not

only the income computed under the head „business‟ but also

the interest and securities in succeeding years. Following

observations in the said judgment give the rationale for

permitting this course of action:

"The scheme of the Income-tax Act is that income-tax is one tax. Section 6 of the Income-tax Act, 1922, classifies the taxable income under different heads for the purpose of computation of the net income of the assessee. Though, for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of income from business if the securities are part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of Section 6 but on commercial principles."

11. Thus, even if the interest on securities is separately classified,

view was taken that the said income would not cease to be part

of income from business if the securities are part of trading

assets. Gujarat High Court in the case of Additional

Commissioner of Income Tax Vs. Laxmi Agents P. Ltd.,

125 ITR 227 followed the aforesaid principles and summed up

the legal position in the following manner:

"In is thus clear that even though an item of income falls under a specific head, in spite of the fact that that item is earned for the purpose of business, for purposes other than the computation of income, the commercial character of that income can be taken into account. In the case before us, the commercial character of that income becomes helpful to us in determining whether the borrowing on which the interest is paid was for the purposes of business. We therefore, conclude on the second question that the Tribunal was right in holding that though the income from dividend has to be assessed under a separate head, payment of interest by the assessee on amounts borrowed for purposes of investments must be allowed as business expenditure, and not as expenditure incurred for earning dividends. This, therefore, settles question No. 2."

12. It would, therefore, be immaterial as to under what head

specified under Section 14 of the Act that the income is

computed. Even when it is not computed under the head

„income from profession and business‟, the commercial

character of that income could still be taken into account. If it

is found that the particular income was derived from the

business of the assessee, for the purposes of set off, it can be

taken as business income. This Court in Excellent

Commercial Enterprises and Investment Ltd. (supra) has

concurred with the aforesaid view. In that case, the Court ruled

as under:

"Applying the above settled principles, the Income-tax Appellate Tribunal had affirmed a finding of the Income- tax Commissioner (Appeals) that the Company in the interest of its business and to earn additional profits arising from such stock-in-trade had invested its money which was earning dividends on shares held in stock-in- trade. This was thus and rightly so treated as income from business and not income from other sources. No distinctive features have been placed before us which could persuade the Court to take a view different than the one which has been taken in the above orders. Even otherwise, it would be a finding of fact based and referable to the records which were produced before the Income-tax Tribunal.

Once it is held that the shares held by the assessed as a stock in trade and the income whether directly or incidentally for holding of such shares as stock-in-trade, would be business income then it cannot be said that the dividend income would fall as an income from other sources as contemplated under section 56 of the Act and that set off of under section 72 of the Act in subsequent year would not be permissible............"

13. So far so good. But the relevant question, which is the core

one and led CIT to pass the order under Section 263, of the Act

is as to whether the AO applied his mind to the issue as to

whether the dividend income could be given the character of

business income for the purpose of set off. We have already

taken note of the order of the AO. He recorded that even a

dividend income in question was shown as business income by

the assessee. The AO did not agree with the same, as in the

previous years this income was shown as dividend income.

After saying so, the AO straightaway allowed the set off of this

income against the carry forward losses. The assessment order

is totally silent and there is no discussion as to how this

dividend income was to be given the character of business

income for the purpose of set off under Section 72 of the Act. It

was for this reason that the CIT held that the AO had not

conducted any inquiry. The Tribunal, instead of appreciating

these facts, went into the merits of the issue which the AO is

supposed to deal with. It addressed the question as to whether

dividend income could be given the character of business

income and then observed that the view taken by the AO was

plausible without appreciating that the AO had not even taken

any view on this issue, it could not be said that the AO had not

applied his mind. The entire reading of the assessment order

clearly demonstrates that no such view is taken at all by the AO

on this aspect. It is intriguing, in the circumstances, as to from

where the Tribunal came to the conclusion that the view taken

by the AO was plausible or that the AO had applied his mind.

14. The Tribunal failed to appreciate the limited scope of appeal

before it, viz., the validity of the order passed by the CIT

exercising his revisionary power under Section 263 of the Act.

Order of the CIT clearly revealed that he had applied his mind

on the relevant aspect and had rightly noticed that the

character of the said income was not investigated by the AO.

This is highlighted by the CIT in Para 7 of the order passed by

him, which is already extracted above. Therein, the CIT

recorded that the Assessing Officer had failed to conduct the

required enquiry and also had failed in application of the

provisions of Section 72 (1) of the I.T. Act. This rendered order

passed by the AO erroneous and prejudicial to the interest of

Revenue to that extent. The Tribunal was, thus, supposed to

adjudge the validity of such an order and not to go beyond

when the challenge before it was limited to the said order

passed by CIT in exercising the powers under Section 263 of

the Act.

15. Mr. Ajay Vohra, learned counsel appearing for the assessee

argued that when the view taken by the AO was plausible one,

it was not proper for the CIT in exercise of his revisionary

jurisdiction to interfere with that order and referred to the

judgment of the Punjab and Haryana High Court in the case of

Commissioner of Income Tax Vs. Max India Ltd. 268 ITR

128 which is approved by the Supreme Court in the case of

Commissioner of Income Tax Vs. Max India Ltd. 295 ITR

282. However, this argument based on the aforesaid judgment

is of no avail in the facts of the present case when it is found

that the AO had not examined the issue at all and therefore,

question of there being a plausible view does not arise.

16. We, thus, answer the question formulated above, in favour of

the Revenue and against the assessee, as a result, the

impugned order passed by the Tribunal is set aside.

17. However, there shall not be order as to costs.

ITA No.1345/2010

18. Insofar as this appeal is concerned, after the CIT had passed

the order under Section 263 of the Act, the AO in order to give

effect to the same, passed order dated 30.07.2008 under

Section 143(3)/263 of the Act. This order was challenged by

the assessee before the CIT (A). Since the Tribunal had

quashed the order of CIT under Section 263 of the Act vide

decision dated 26.03.2009, as a consequence, following that

order, the CIT (A) allowed the appeal of the assessee vide

orders dated 22.06.2009 setting aside the aforesaid order of

the AO, which order has been confirmed by the Tribunal vide

impugned order dated 02.02.2010. As order of the CIT dated

07.03.2008 passed under Section 263 of the Act is restored, the

impugned order dated 22.06.2009 and order dated 02.02.2010

passed by the CIT (A) and the AO are set aside and the matter

is restored to the file of the CIT (A) to decide the appeal of the

assessee on merits insofar as challenge of the assessee to

orders dated 30.07.2008 passed by the AO under Section

143(3)/263 of the Act is concerned.

19. Appeals are disposed of in the aforesaid terms.

(A.K. SIKRI) JUDGE

(M.L. MEHTA) JUDGE MAY 11, 2011 pmc