IN THE ITAT AHMEDABAD BENCH ‘A’

Punjab Lease Financing Ltd.

v.

Income-tax Officer, Ward-5(2), Ahmedabad

P.K. Bansal, Accountant Member

and D.T. Garasia, Judicial Member

IT Appeal Nos. 3414 (Ahd.) of 2004 and 1939 (Ahd.) of 2006

[Assessment year 2001-02]

January 4, 2008

Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Assessment year 2001-02 - Whether an order can be said to be erroneous if there is incorrect assumption of facts or incorrect application of law in order by Assessing Officer and if Assessing Officer after making enquiries and examining records has taken one of possible views, it cannot be said that order passed by Assessing Officer is erroneous - Held, yes

Section 73, read with section 263, of the Income-tax Act, 1961- Losses - In speculation business - Assessment year 2001-02 - Whether Explanation to section 73 would not be applicable in such case where prin­cipal business of assessee is that of granting of loans and advances - Held, yes - Whether, therefore, where assessee-company which was mainly engaged in business of granting loans and advances, had incurred loss in trading of shares, such loss could not be treated as speculative loss as per Explanation to section 73 - Held, yes , - Whether therefore, Assessing Officer was justified in not applying Explanation to section 73 in case of assessee and such an order could not be revised by Commissioner, under section 263 - Held, yes

Facts

The assessee, a non-banking financial company registered with the Reserve Bank of India, mainly engaged in the business of grating loans and advances, set off certain loss, which it incurred on trading of shares carried out during the year under consideration, against its business income. The Assessing Officer completed the assessment without disallowing that loss. The Commissioner, however, set aside the said order by invoking the provisions of section 263 on the ground that the Explanation to section 73 was applicable in the assessee’s case. He was of the view that the loss was in the nature of speculation loss and the assessee was not entitled to set off the same against any other income except speculation gain.

On second appeal :

Held

Interpretation of section 263

From a perusal of section 263, it is apparent that there are four main features of the power of revision to be exercised under section 263 by the Commissioner. Firstly, the Commissioner may call for and examine the records of any proceedings under the Act and for this purpose he need not show any reason or record any reason to believe. It is a part of his administrative power to call for the record and examine it relating to any assessee. Secondly, he may consider any order passed by the Assessing Officer as erroneous as well as prejudicial to the interest of the revenue. This consideration having regard to the language of section 263 apparently is a consideration which he exercises in calling for and examining the record available at this stage. There is no question of the assessee to appear and make submis­sion. Thirdly, if after calling for and examining the records the Commissioner considers that the order of the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue, he is bound to give an opportunity to the assessee of being heard and after making or causing to be made such enquiry as he may deem fit, pass such order thereon as the circumstances of the case may justify including an order enhancing or modifying the assessment or cancelling assessment and directing a fresh assessment. This empowers the Commissioner to cause or make such enquiries as he deems necessary. Fourthly, the Commissioner under section 263 can enhance or modify the assessment.

Thus, in order to invoke the provisions of section 263, both the conditions that the order passed by the Assessing Officer is erroneous and also that it is prejudicial to the interest of revenue must be satisfied. If one of them is absent, it will be held that the provisions of section 263 were not lawfully invoked. The term ‘erroneous’ has not been defined under the Act, but it is well-settled that each and every type of mistake or error committed by the Assessing Officer cannot be said to be an error. An order can be said to be erroneous if there is incorrect assumption of facts or incorrect application of law in the order by the Assessing Officer, and if the Assessing Officer after making the enquiries and examining the records has taken one of the possible views, it cannot be said that the order passed by the Assessing Officer is erroneous. [Para 7]

Applicability of Explanation to section 73

From a plain reading of the Explanation to section 73 it is apparently clear that said Explanation is applicable where any part of the business of a company consists of the purchase and sale of shares of other companies, such company shall, for the pur­poses of section 73, be deemed to be carrying on the speculation business to the extent to which the business consists of purchase and sale of shares. Two exceptions are provided under this Expla­nation and wherever these exceptions are applicable, loss in purchase and sale of shares would not be regarded to be the speculation loss. The first exception is applicable to the company whose gross total income consists mainly of income chargeable under the heads ‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ and ‘Income from other sources’. The second exception is applicable to a company where the principal business of the company is the business of banking or granting of loans and advances. The first exception relates to the gross total income under the different heads of income. There was no dispute on the facts of the case that in the case of the assessee, the assessee’s gross total income did not consist mainly of the income which was chargeable under the heads ‘Interest on securi­ties’, ‘Income from house property’, ‘Capital gains’ and ‘Income from other sources’. The claim of the assessee in the instant case was that its case was covered by the second exception. The assessee had taken a specific plea before the Commissioner stating that its principal business was of granting of loans and advances. Al­though, the Commissioner had referred in his order, the utiliza­tion of funds by the assessee and, the turnover, for examining the principal business of the assessee, yet had not given any finding that the principal business of the assessee was not granting of loans and advances. Under his order under section 263, the Commissioner held that the assessee was not a banking company and that the assessee was not an investment company. But nowhere the Commissioner had held that the assessee was not the one which was not engaged in the business of granting of loans and ad­vances. That would clearly show that the Commissioner agreed with the contentions of the assessee that it was engaged in the busi­ness of granting of loans and advances. Even no such error was pointed out by the Commissioner in his order passed under section 263 that the assessee was not the company which was engaged in the business of granting loans and advances. [Para 10]

In the case of  Dy. CIT v. Venkateswar Investment & Finance (P.) Ltd. [2005] 93 ITD 177 (Kol.), the Special Bench had considered the criteria of the principal business of granting of loans and advances with reference to the Explanation to section 73. It held that the provisions of Explanation to section 73 make it clear that the loss in purchase and sale of shares shall not be treated as speculation loss in the case of a company, the principal business of which is the business of granting of loans and ad­vances as provided in the Explanation to section 73. [Para 12]

In the case of Asstt. CIT v. Concord Commercials (P.) Ltd. [2005] 95 ITD 117 (Mum.), the Special Bench held that the two kinds of exceptions provided in Explanation to section 73 are based on two independent tests laid down in the Explanation itself. The test to be applied on the first category of company is the character of its gross total income. The test laid down in the case of the second category of company is the nature of the principal busi­ness carried on by it. In the first category, where the test is that of the character of loss total income, the other test relat­ing to the nature of principal business carried on by it does not apply. Likewise in the second category of company where the test is of the nature of the principal business carried on by it, the test of the gross total income does not apply. The two exceptions provided in Explanation to section 73 are governed by two differ­ent tests laid down in the said Explanation itself. Therefore, the examination of the exceptions provided in Explanation to section 73 is to be done strictly in accordance with the tests laid down in the Explanation. In view of the said decision of the Special Bench, it could be said that the income criteria will not apply for determining whether the assessee’s principal business is of granting of loans and advances. [Para 13]

Similar view has been taken in a catena of decisions that when the principal business of the assessee is that of granting of loans and advances, the Explanation to section 73 would not apply. As already pointed out that the Commissioner in his order passed under section 263 nowhere rejected the plea of the assessee that the principal business of the assessee was not that of granting of loans and advances and, therefore, it could be said that  there was no error in the order of the Assessing Officer. It is a settled law that where the Assessing Officer takes a view until and unless that view is not unsustainable in law, it cannot be said that the order passed by the Assessing Officer is erroneous. [Para 15]

The Supreme Court in the case of  Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 has held that where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Assessing Officer is unsustainable in law. In view of the aforesaid decision of the Supreme Court and the decisions of the Special Bench of Tribunal, it was to be held that there was no error in the order of the Assessing Offi­cer in not applying the Explanation to section 73 in the case of the assessee in respect of loss incurred by it on the purchase and sale of shares, as the principal business of the assessee was that of granting of loans and advances. Therefore, the Commissioner was not correct, in law, in setting aside the order of the Assessing Officer and, accordingly, the order passed by him under section 263 was to be cancelled and, thus, the appeal of the assessee was to be allowed. [Para 20]

Case review

Dy. CIT v. Venkateswar Investment & Finance (P.) Ltd. [2005] 93 ITD 177 (Kol.) (SB) (para 12); Asstt. CIT v. Concord Commercials (P.) Ltd. [2005] 95 ITD 117 (Mum.) (SB) (Para 13); Malabar Indus­trial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) (para 20) - followed.

Cases referred to

Melville Finvest Ltd. v. Jt. CIT [2004] 89 ITD 528 (Hyd.) (para 3), Asstt. CIT v. Concord Commercials (P.) Ltd. [2005] 95 ITD 117 (Mum.) (SB) (para 4), Dy. CIT v. Venkateswar Investment & Finance (P.) Ltd. [2005] 93 ITD 177 (Kol.) (SB) (para 4), Barkha Investment & Trading Co. v. CIT [2006] 281 ITR 316 (Guj.) (para 4), Narain Properties Ltd. v. Asstt. CIT [2007] 11 SOT 1 (Lucknow) (para 4), ITO v. Raghav Commercial Ltd. [1983] 16 TTJ (Cal.) 335 (para 4), CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 (SC) (para 4), Nawn Estate (P.) Ltd. v. CIT [1977] 106 ITR 45 (SC) (para 4), Asstt. CIT v. Tanna Electro Mechanics (P.) Ltd. [2006] 7 SOT 121 (Mum.) (para 4), Thalibai F. Jain v. ITO [1975] 101 ITR 1 (Kar.) (para 6), Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.) (para 6), CIT v. Seshasayee Paper & Boards Ltd. [2000] 242 ITR 490/108 Taxman 464 (Mad.) (para 6), CIT v. M.M. Khambhatwala [1992] 198 ITR 144 (Guj.) (para 6) and Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) (para 6).

Sakar Sharma for the Appellant. K. Sridhar for the Respondent.