COMMISSIONER OF INCOME-TAX VS DR. B.A. RAJAKRISHNAN
1999 P T D 1367
[226 I T R 323]
[Kerala High Court (India)]
Before V. V. Kamat and P.A. Mohammed, JJ
COMMISSIONER OF INCOME-TAX
Versus
Dr. B.A. RAJAKRISHNAN
I.T.R. No. 79 of 1986, decided on 05/06/1996.
Income-tax---
----Revision---Condition precedent ---I.T.O.'s order should be erroneous and prejudicial to interests of Revenue---Loss to Revenue very slight---Order of revision could not be passed---Indian Income Tax Act, 1961, S.263.
An order of revision under section 263 of the income Tax Act, 1961, necessarily presupposes statutory satisfaction that although there is some error with regard to the completed assessment, the order passed by the Income-tax Officer is erroneous in so far as it is prejudicial .to the interests of the Revenue. It is not every error or mistake which should induce the Commissioner of Income-tax to resort to exercise of the powers under section 263 of the Act. Held accordingly, that the Tribunal had considered the matter and found that the loss to the Revenue would be marginal. The assumption of jurisdiction under section 263 was not valid.
CIT v. P.M. Muthuraman Chettiar (1962) 44 ITR 710 (SC), Ram Chandra Munna Lal v. CIT (1949) 17 ITR 394 (East Punjab) and South Indian Industrials Ltd. v. CIT f 1935) 3 ITR 11 (Mad.) ref
P.K.R. Menon and N.R.K. Nair for the Commissioner.
C. Kochuttni Nair, M.A. Firoz and Dale P. Kurian for the Assessee.
JUDGMENT.
V.V. KAMAT, J.---The Income-tax Appellate Tribunal has referred the following question:
"Whether, on the facts and in the circumstances of the case and also on an interpretation of sections 28, 37(3-A) and 37(3-D)---
(i) the assumption of jurisdiction by the Commissioner of Income-tax under section 263 would not be valid?
(ii) the Tribunal is right in holding that 'the disallowance under section 37(3-A) should be made for each of the businesses carried on."
Where, a perusal of the question would show that the question as framed involves actually two questions, one with regard to the exercise of jurisdiction by the Commissioner under section 263 of the Income Tax Act, 1961, the other question as to whether the Tribunal is right in holding that the disallowance under section 37(3-A) should be made for each of the businesses carried on, although tagged alongwith it is a separate question by itself. Obviously an answer to the exercise of jurisdiction under section 263 of the Act by the Commissioner would only make it necessary, if it is in the negative, the proceed with consideration of the other question.
After hearing learned senior standing counsel for taxes at length, we would concentrate on the question of exercise of jurisdiction under section 263 of the Act. In the view which we are taking for more than one reason, jurisdiction under section 263 of the Act on the facts and circumstances of the case would not be justifiable. As a consequence thereof, although learned senior standing counsel strenuously made some attractive submissions at the first blush we feel it unnecessary to reserve consideration in a better case justifying exercise under section 263 of the Act in regard thereto. If the exercise under section 263 of the Act would not be justifiable, consideration of the provisions of section 37 with regard to the disallowance could be postponed to an appropriate occasion. We adopt this course on the facts and circumstances of the case, although we would mention by way of a summary the gist of the submissions in regard thereto.
The assessment year in question is 1979-80 for which the previous year ends on March 31, 1979. For the year in question, under section 143(3) of the Act the assessment order, dated April 30, 1981, already completed the assessment proceedings. The total income of the assessee was determined at Rs.78,950.
There is no dispute that the assessee was carrying on business in the name and style of Radhas Perfumery Enterprises and simultaneously was also running a weekly called Kerala Sabdam. He was also earning income from other sources.
The Commissioner of Income-tax, with regard to this completed assessment, felt that the assessee was allowed deduction under section 37 towards advertisement, publicity and business promotion expenditure for an amount of Rs.71,921 wrongly because the upper limit of allowance could not exceed Rs.40,000 under the provisions of section 37(3-A) of the Act. The Commissioner felt that this was erroneous. He also felt that this was prejudicial to the interests of the Revenue.
He issued a notice, dated April 12, 1983, which was replied to on April 16, 1983. The reply contended that the assessment could not be said to be either erroneous or even prejudicial to the interests of the Revenue, urging on the basis that there are no grounds to invoke the powers under section 263 of the Income-tax Act.
By the order, dated April 22, 1983, the Commissioner of Income?-tax acting under section 263 of the Income Tax Act, 1961, considered the statutory provisions with reference to the factual matrix. The Commissioner held that the business activity carried on in the name of Radhas Perfumery Enterprises could not be considered as an industrial undertaking set up by the assessee because it was an extinct firm of which the assessee was one of the partners and it was taken over by the assessee as his proprietary concern during the previous year only 1979-80. The Commissioner further observed that the scheme of the Act as could be understood from the provisions of section 37(3-D) would not be to give benefit for three years to the assessee, who sets up an industrial undertaking and then another three years to the person who takes it over as a proprietary concern.
Regarding the details given by the assessee the Commissioner rejected them in the absence of any proof to establish those details. Carefully perusing the order of the Commissioner of Income-tax, Trivandrum, it must be stated that satisfaction of the statutory requirements of section 263 as to how the situation would be prejudicial to the Revenue so as to justify exercise of the powers under section 263 of the Act is conspicuous by its absence. This is the requirement of the statutory provision. In view of what is taken into consideration by the Tribunal in the impugned order, in our judgment it is necessary for us to find out as to whether his exceptional power to reopen the completed assessments gets satisfaction from the material on record in view of the statutory provision that the Commissioner of Income-tax has been bestowed with the power of reopening the completed assessment, being prejudicial to the Revenue being the most important consideration in regard thereto.
The assessee took up the matter before the Income-tax Appellate Tribunal, Cochin Bench, and it is this order, dated June 14, 1985, which is impugned by the Department persuading the Tribunal for reference of the question referred to hereinbefore.
The Tribunal considered the question in a two-fold manner.
First it considered the question of disallowance contemplated under section 37(3-A) whether it is to be applied to the whole of the expenditure incurred towards advertisement, publicity and business promotion expenses by the assessee or whether such disallowance is to be applied for such expenses incurred for each of the business activities carried on by the assessee.
The Tribunal considered the other aspect as to whether Messrs. Radhas Perfumery Enterprises, previously run by a firm and now taken over by the assessee as a proprietary concern on and from April 1, 1978, as an industrial undertaking, would be entitled to the benefit of the statutory provisions of section 37(3-B) of the Act.
The Tribunal considered the factual matrix from the point of view of bifurcation of the advertisement, publicity and business promotion expenses with reference to the two concerns. The said bifurcation considered by the Tribunal is as follows:
| | Advertisement charges | Business promotion | Publicity | Total |
| | Rs. | Rs. | Rs. | Rs. |
| Radhas Perfumery Enterprises | 33,010 | 12,137 | ??? | 45,247 |
| Kerala Sabdam weekly | ??.. | 9,537 | 16,737 | 26,274 |
| | | | | 71,521 |
The Tribunal considered with regard to the amount of Rs.12,137, particulars placed before it. They are as follows:
| | Rs.???? Ps. |
| Travelling expenses incurred by Dr.Ra dhakrishnan | 1,028.00 |
| Advertisement in small newspapers | 3,075.00 |
| Canvassing expenses paid to Radhakrishnan, | 1,281.40 |
| Menon and Sasidharan | 53,84.40 |
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The submission that is considered by the Tribunal with regard to the amount of Rs.45,247 and the explanation with regard to the amount of Rs.12,137 attributable to business promotion as would be found from the second column of the statement specified above. The Tribunal considered the submission of the assessee that in view of this marginal difference the assumption of jurisdiction under section 263 of the Act should not be considered as warranted. In the process of discussion, in the context the question before the Tribunal was as to whether each and every business activity carried on by the assessee is to be considered in the aggregate or would have to be separately computed all put together in the process of calculation of the concerned deductions. It appears that relying on the commentary at page 1111 in Iyengar's Law of Income Tax, Seventh Edition, and the position as available from the decision of the Madras High Court in South Indian Industrials Ltd. v, CIT (1935) 3 ITR 11 and the East Punjab High Court in Ram Chandra Munna Lal v. CIT (1949) 17 ITR 394 and drawing the logical inference from the decision of the Supreme Court in CIT v. Muthuraman Chettiar (P.M.) (1962) 44 ITR 710 cited in the order, the Tribunal reached the conclusion that the provisions of section 37(3-A) would have to be considered for application to each of the business activities carried on by an assessee independently and separately and not on aggregate basis. The Tribunal also has drawn support from the Department Circular No.240, dated May 17, 1978, to its conclusion that each business activity would be required to be considered.
Apart therefrom, on the merits in paragraph 9 of the order, the Tribunal considered the position that the situation is reflecting the marginal excess. The Tribunal has considered that some material placed before it the situation would show that the excess with regard to one of the concerns, namely, Radhas Perfumery Enterprises, would be so marginal as amounting to Rs.4,103. The Tribunal further observed that the factual matrix does not justify assumption of jurisdiction under section 263 of the Act.
As regards the other aspects, on examining the factual matrix, the Tribunal has recorded that Radhas Ayuryedic soap was the product which has been manufactured by the firm of three partners out of which the assessee was one.
On April 1, 1978, the remaining two partners retired from the partnership and in the retirement deed, dated April 1, 1978, it is clearly stated that from September 1, 1977, up to March 31, 1978, the business was carried on in the name and style of Radhas Perfumery Enterprises and on and from that date the business was taken over by the assessee-partner. The Tribunal further recorded a factual position that a reading of the retirement deed, dated April 1, 1978, would create no doubt for the conclusion that the ayurvedic soap manufacturing has already commenced and continued for some time by a firm and subsequently the right of carrying on such business was made over to the assessee. As a consequence thereof it is further recorded that the assessee's return disclosed the profits of Radhas Perfumery Enterprises only for a period from April 1, 1978, up to November 30, 1978, and, therefore, the assessee's undertaking would appear to be a new undertaking. In this context, the Tribunal relied on the decision of the Bombay Bench of the Tribunal in ITO v. Ciffies Chemicals and Pharmaceuticals (P.) Ltd. 21 TTJ (Bom.) 409 to the effect that if an industrial undertaking previously used by some other person has been formed and the business is already in existence, the provisions of section 37(3-D) of the Act would exempt the continuing undertaking for the year in question because of the commencement of manufacture or production for the two succeeding years. The factual matrix, in our judgment, stares in the face of the record in the light of the legal requirement of a satisfaction that invoking of the powers under section 263 of the Act necessarily presupposes the statutory satisfaction that although there is some error with regard to the completed assessment, the order passed by the Income-tax Officer has to be erroneous in so far as it is prejudicial to the interests of the Revenue. In other words, the plain 19nguage of the section is more than abundantly clear that it is not every error or mistake that should induce the Commissioner of Income-tax to resort to exercise of the powers under section 263 of the Act. In our judgment, the factual matrix shows that it is a marginal situation and when by a careful and cautious judgment the Tribunal has considered exercise of the powers under section 263 of the Act by the Commissioner as not proper, although the phrase is "not valid". The situation does not call for any interference in regard thereto.
In fact, and as stated at the outset, our endorsement on the conclusion of the Tribunal that the exercise of the powers under section 263 of the Act by the Commissioner was not proper, should be the be-all and the end-all of the situation.
Again, as stated at the outset, although learned senior standing counsel for taxes took us in detail through the provisions of sections 37(1), 37(2-B), 37(3) and 37(3-A) as it stood then, the text of which is to be found at page 162 of the Iyengar's Income Tax Act, 1983 Edition, and section 37(3-D) for a submission on the basis of reading the statutory provisions that what is required to be considered is the expenditure incurred by an assessee and therefore, whatever may be the number of businesses or professional activities of the assessee deduction could be attributable with advantage only to the assessee concerned creating no justification for considering each of the businesses and/professional activities independently and separately. Apart from the position that in view of our conclusion as regards exercise of the powers under section 263 of the Act, even the factual matrix as we have decided hereinbefore not making out a case as required by the provisions of section 263 of the Act, we make it clear that consideration of the submissions in regard to the application of the provisions of section 37 in regard to an assessee carrying-on multiple businesses and/or professional activities not arising really under the above situation should be considered on an appropriate occasion in a situation where section 263 of the Act could be understood to have been justifiably and legally invoked. For all the above reasons, part (i) of the question regarding the assumption of jurisdiction under section 263 of the Act is answered against the Revenue and in favour of the assessee and part (ii) of the question regarding the disallowance is declined to be answered.
A copy of this judgment under the seal of this Court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench, Kochi, for passing consequential orders.
M.B.A./1907/FC???????????????????????????????????????????????????????????????????? Order accordingly.