(a) Income-tax---

----Business expenditure---Other sources---Deductions from income from other sources---Disallowance of interest under Ss.40A(8) & 58(2)-- Disallowance not applicable to miscellaneous finance company-- Decision by CIT in relation to assessment years 1983-84 and 1984-85 that assessee was a miscellaneous financial company ---Assessee was entitled to deduction of interest in assessment years in question---Indian Income Tax Act, 1961, Ss.40A & 58.

(b) Income-tax---

----Revision---Appeal---Rectification of mistakes---Powers of CIT under S.264 Disallowance of interest under Ss.40A(8) & 58(2)---Appeal against quantum of disallowance---Subsequent petition for rectification on the ground that assessee was a miscellaneous finance company and hence Ss.40A(8) & 58(2) were not applicable to it---Dismissal of rectification proceeding by ITO and proceedings under 5.264 by CIT not correct---Indian Income Tax Act, .1961, Ss. 40A, 58, 154 & 264.

The assessee objected to the disallowance of interest payments under sections 40A(8)/58(2) of the Income Tax Act, 1961, and clamed that only amounts attributable to business could be disallowed. On appeal, the Commissioner of Income-tax (Appeals) accepted the claim and modified the orders. Subsequently, the, assessee filed a petition under section 15.4 of the Act for rectification on the ground that since the assessee was a miscellaneous financial company, sections 40A(8)/58(2) The petition was dismissed. A revision was preferred under section 264 of the Act. The Commissioner of income-tax dismissed the petition on a technical ground holding that since an appeal was preferred against disallowance of interest the order could not have been rectified under section 154 in view of subsection (1A.) of section 154. On a writ petition filed for quashing of the orders:

Held, that no appeal was filed against the order of the Income- tax Officer refusing to, rectify the assessments under section 154. The question whether sections 40A(8)/58(2) was applicable to the assessee or not, was not the subject-matter of appeal to the Commissioner (Appeals)' whereas the only point raised in the appeal was regarding the quantum of disallowance based on sections 40A(8)/58(2). In such circumstances, the provisions of section 154(1A) were not applicable to the assessee's case. Therefore, the Income-tax Officer was not correct in dismissing the petitions under section 154 for rectification on the merits. Further, the order rejecting the revision petition on a technical ground was also illegal and without jurisdiction. The Commissioner himself by his order for subsequent years held that sections 40A(8)/58(2) would not apply because the assessee was a miscellaneous financial company and directed the Income-tax Officer to delete the disallowance of interest. There was no appeal against the order. Hence, that benefit could be extended to the assessment years in question. The orders of the Income-tax Officer on the rectification petitions and disallowance of interest were against law, without jurisdiction and liable to be quashed.

P.P.S. Janarthana Raja for Petitioners.

S. V Subramaniam for C. V. Rajan for Respondents.

JUDGMENT

Since in all these writs, the point involved and also the parties are common, all these wit petitions are disposed of by this common order with the consent of the parties concerned.

Invoking Article 226 of the Constitution of India, the petitioner herein has filed the present writ petitions and seeks for a writ of certiorarified mandamus to quash the orders of the first respondent in C. No.217-1/33 of 1986-87, etc., dated September 7, 1988, and September 13, 1988, respectively, as illegal and without jurisdiction and also to direct the respondents to delete the disallowance of interest under sections 40A(8)/58(2) of the Income Tax Act, 1961.

In support of the writ petitions the petitioner herein has filed separate affidavits wherein he has narrated all the facts and circumstances that forced him to file the present writ petitions and requested this Court to allow the writ petitions as prayed for. On behalf of the respondents though no count -affidavit was filed, they argued the matter.

Heard the arguments a advanced by learned counsel appearing for the petitioner and also those of learned senior counsel appearing for the Department. I have perused the contents of the affidavits together with all the relevant material documents available on record in the form of typed set of Papers. I have also taken into consideration the various points raised by learned counsel appearing for the parties during the course of their arguments.

The brief facts of the case of the petitioner herein as seen from the affidavits are as hereunder. The assessment years concerned in these writ petitions are 1976-77, 1977-78, 1980-81. 1981-82 and 1982-83. In all these assessments, there was disallowance of interest under sections 40A(8)/58(2) of the Income-tax Act. Such disallowance of interest is as follows for the respective assessment years

The petitioner objected to such disallowance on the ground that the entire interest cannot be treated for disallowance under sections 40A(8)/58(2); but only that amount attributable to the business. It was also contended by the petitioner that the disallowance under sections 40A(8)/58(2) should have been made only with reference to the amount of interest on deposits and not in respect of other interest paid. It is the case of the petitioner herein that the total interest amount should be apportioned between "business" and "other income" and section 40A(8) has to be applied to the "interest on deposits charged against business income. But the Income-tax Officer did not accept the contention of the petitioner and has made such disallowance. Aggrieved by the order of the Income-tax Officer, the petitioner filed appeals to the Commissioner of Income-tax (Appeals) IV, Madras, who by this common order, dated July 29, 1985, accepted the contention of the petitioner and directed the Income-tax Officer to modify his orders. The relevant extract of the order of the Commissioner of Income-tax (Appeals) IV, is extracted as under:

"13(iii).Disallowance under section 40A(8)---Rs. 32,553 The assessee--Company made certain interest payments and the Income-tax Officer disallowed 15 per cent. of such interest payments under section 40A(8). He made a disallowance of Rs. 32,553. The appellant says that the disallowance under section 40A(8) can be made only in respect of interest payment coining under the head `Business'. The appellant says that interest payments considered under any other source should not be disallowed.

14Under section 40A(8) interest payments made by an assessee under the head `Business' should be subjected to a 15 per cent. disallowance. Similarly under section 58(2) a 15 per cent. disallowance should also be made in respect of interest payments considered under the head Income from other sources. In respect of other interest payments, for example---under the heads Interest on securities and House property---no disallowance is called for. The Income-tax Officer is directed to modify the disallowance accordingly."

The question whether sections 40A(8)/58(2) was applicable to the petitioner was neither raised nor argued or considered by the Commissioner of Income-tax (Appeals) and was not an issue before him. Subsequently, the petitioner made questions to the Income-tax Officer, Companies Circle 1(4), Madras 600 034, requesting the officer to rectify his assessment under section 154 of the Income-tax Act on the ground that the petitioner is a miscellaneous financial company referred to in sub-clause (vi) of clause (c) of the Explanation to sections 40A(8)/58(2) and that. therefore, the said section was not applicable to the petitioner Company. The Income-tax Officer by his common order for the assessment years 1976-77, 1977-78, 1980-81 to 1984-85, dated July 11. 1986, declined to pass an order rectifying the assessment and he dismissed the petitions under section 154 of the Income-tax Act. Aggrieved by the order of the Income-tax Officer, the petitioner filed a petition under section 264 of the Income-tax Act with the first respondent. However, the first respondent without going into the merits of the case held that since the petitioner had filed an appeal against the disallowance of interest under sections 40A(8)/58(2), the Income-tax Officer could not have rectified the assessment under section 154 of the Act in view of subsection (IA) of section 154 and in this view of the matter, dismissed the petitions on a technical ground. However, the first respondent by his order C. No.217-1/28 of 1987, dated September 21, 1988 for the assessment year 1983-84 and C. No.217-1(27 of 1986-87), dated September 21, 1988, for the assessment year 1984-85 allowed the petitioner's submissions on the ground that sections 40A(8)/58(2) was not applicable and directed the Income-tax Officer to delete the disallowance of interest for these assessment years. Therefore, the first respondent is not correct in dismissing the petition under section 264 on the ground that section 154(1A) is applicable to the petitioner's case. He should have considered the arguments of the petitioner made before him at the hearing of the case. He should have found that section 154(IA) was not applicable since the ground taken in section 154 proceedings was neither the subject-matter of appeal nor the subject-matter of the decision before the Commissioner of Income-tax (Appeals) and, therefore, section 1.54(1A) was not a bar to him to pass orders under section 264 of the Income-tax Act. While the Income-tax Officer dismissed the petitions under section 154 for rectification on the merits, the first respondent dismissed the petition on the grounds of maintainability in view of section 154(1A). Having held on the merits that the petitioner is a miscellaneous financial company for some assessment years, there was no justification for rejecting the petition of the petitioner on the ground of maintainability without considering the merits of the case for other assessment years. The provisions of sections 154(1A) are not applicable to the petitioner's case. The first respondent having accepted the contention of the petitioner on the merits that sections 40A(8)/58,(2) is not applicable to the petitioner for certain assessment years is not correct in dismissing the present petitions under section 264 on technical grounds. Hence, these writ petitions.

In this case, the disputed point is that whether the disallowance made in the concerned assessments under section 40A(8) of the Income Tax Act, 1961, by the Income-tax Officer is correct or not. Such disallowance is vehemently objected to by the petitioner on the ground that the entire interest cannot be treated for disallowance under sections 40A(8)/58(2), but that amount attributable to the business. According to the petitioner, section 40A(8) has to be applied to the "interest on deposits" charged against business income. The Income-tax Officer did not accept the said contention of the petitioner. But on appeal before the Commissioner of Income-tax (Appeals) (IV), by his common order he accepted the contention of the petitioner and directed the Income-tax Officer to modify his order. In the said order it has been specifically held by the Commissioner of Income-tax (Appeals) (IV), as follows:--

"Under section 40A(8) interest payments made by an assessee under the head 'Business' should be subjected to 15 per cent. disallowance. Similarly, under section 58(2) a 15 per cent. disallowance should also be made in respect of interest payments considered under the head 'Income from other sources. In respect of other interest payments, for example---under the heads 'Interest on securities and house property, no disallowance is called for."

That being so when the petitioner herein made applications to the Income-tax Officer, requesting the officer to rectify his assessment under section 154 of the Act on the ground that the petitioner-Company is a miscellaneous financial company referred to in sub-clause (vi) of clause (c) of the Explanation to sections 40A(8)/58(2) and that, therefore the said section was not applicable to the petitioner-Company. but, the Income-tax Officer by his common order for the assessment years in question, i.e. 1976-77, 1977-78, 1980-81 to 1984-85. dated July 11, 1986, declined to pass an order rectifying the assessment on the ground that the petitioner was, not a financial company within the meaning of sub-clause (vi) of clause (c) of the Explanation to sections 40A(8)/58(2) and according to the Income-tax Officer because the petitioner's major head of income is income from properly, it cannot be said to carry on exclusively or almost exclusively two or more classes of business referred to in the sub-clause preceding sub-clause (vi). In this view of the matter, he dismissed the petitions under section 154 of the Income-tax Act. Aggrieved by the order of the Income-tax Officer, the petitioner filed petitions under section 264 of the Act with the first' respondent. Before him it warms contended that the Commissioner of Income-tax (Appeals) by his order, dated March 7, 1988, in I.T.A. No.156 of 1986-87 for the assessment year 1985-86 and also by his order, dated April 21, 1988, in I.T.A. No.20 of 1987-88 for the I assessment year 1979-80 held that the petitioner should be regarded as a miscellaneous financial company as defined under sub-clause (vi) of clause (c) of the Explanation to sections 40A(8)/58(2) and in view of this no disallowance of interest could be made under sections 40A(8)/58(2). It is also significant to note that the Income-tax Department had accepted the decision of the Commissioner of Income-tax (Appeals). But, the first respondent without going into the merits of the case held that since the petitioner had filed an appeal against the disallowance of interest under sections 40A(8)/58(2), the Income-tax Officer could not have rectified the assessment under section 154 of the Act in view of subsection (1 A-) of section 154 of the Act and in this view of the matter, dismissed the petitions on a technical ground. Here it is significant to note that section 264 only provides that no appeal should have been filed against the order which was subject-matter of dispute under the provisions of section 264 and in this case it is an admitted fact that no appeals have been filed against . the order of the Officer refusing to rectify the assessment under section 154 of the Act in respect of the question whether the provisions of section. 40A(8)/58(2) are applicable to the petitioner's case at all. That factum was not at all taken into consideration by the first respondent while dismissing the revision petition under section 264. That apart, yet another significant circumstances in this case is that the first respondent himself by his order C. No.217-1/28 of 1987, dated September 21, 1988, for the assessment tear 1983-84 and C. No.217-1(27) of 1986-87, dated September 21 1988 for the assessment year 1984-85 allowed the petitioner's submissions on the ground that sections 40A(8)/58(2) was not applicable and directed the Income-tax Officer to delete the disallowance of interest for these assessment years. Therefore, there is every force in the argument of learned counsel for the petitioner that the first respondent should have followed his own order for the assessment years 1983-84 and 1984-85 wherein he allowed the petitioner's contention that sections 40A(8)/58(2) is not applicable to the petitioner's case. In the above circumstances, it has been rightly contended by the petitioner that the order of the first respondent for the assessment years 1976-77, 1977-78, 1980-81, 1981-82 and 1982-83 is against the provisions of law and contrary to the facts and circumstances of the case. He is also not correct in not deciding the merits of the case. So also, the first respondent having taken note of the fact that the Department has accepted the position that sections 40A(8)/58(2) is not applicable to the petitioner, he is not correct in dismissing the petitions under section 264 on a technical ground. Further, the first respondent has failed to note that the subject-matter of rectification proceedings before the Income-tax Officer as well as the first respondent under section 264 of the Act was not the subject-matter of the dispute before the Commissioner of Income- tax (Appeals) and, therefore, the provisions of section 154(1A) were not a bar to him to pass orders under section 264 of the Income-tax Act. Another significant aspect in this case is that when the first respondent has dismissed the petitions on the ground of maintainability in view of section 154(1A), the very same first respondent, for the assessment years 1983-84 and 1984--85 allowed similar petitions in favour of the petitioner. Having held on the merits that the petitioner is a miscellaneous financial company for some assessment years, there was no justification for rejecting the petitions of the petitioner on the grounds of maintainability without considering the merits of the case for other assessment years. Further, the Income-tax Officer dismissed the petitions under section 154 for rectification on the merits stating that sections 40A(8)/58(2) was applicable to the petitioner and that was the subject-matter of appeal to the Commissioner (Appeals). It has already been held by this Court that the question whether sections 40A(8)/58(2) was applicable to the petitioner or not. was not the subject-matter of appeal to the Commissioner (Appeals) whereas the only point raised in the appeal is regarding the quantum of disallowance based on sections 40A(8)/58(2). In such circumstances, the provisions of section 154(1 A) are not applicable to the petitioner's case. Therefore, the Income-tax Officer is not correct in dismissing the petitions under section 154 for rectification to the merits. Further, the order rejecting the revision petitions on a technical ground is illegal and without jurisdiction for the only reason that the first respondent had accepted the contention of the petitioner on the merits, that sections 40A(8)/58(2) is not applicable to the petitioner for certain assessment years. Therefore, the first respondent is not correct in dismissing the petition under section 264 on technical grounds. Further, it is a clear case where the first respondent himself has accepted the contention of the petitioner on the merits that sections 40A(8)/58(2) is not applicable to the petitioner for certain assessment years 1983-84 and 1984-85. That being so, there is no explanation from the Department as to why that benefit is denied to the petitioner for the assessment years in question. That apart, in this case the Commissioner of Income-tax (Appeals) has also categorically held that under section 40A(8) interest payments made by an assessee under the head "Business" should be subjected to a 15 per cent disallowance and under section 58(2) a 15 .per cent. disallowance should also be made in respect of interest payments considered under- the head "Income from other sources . He has also held that in respect of other interest payments, for example-under the heads "Interest on securities" and "House property", no disallowance is called for and also has directed the Income-tax Officer to modify the disallowance accordingly. It is significant to note that the Income-tax Department had accepted the decision of the Commissioner of Income-tax (Appeals). In spite of all these aspects Income-tax Officer has declined to pass an order rectifying the assessment simply on the ground that the petitioner Company is not a miscellaneous financial company as per the relevant section. Whereas it is significant to note that the first respondent himself has specifically held in his orders, dated March 7, 1988 and April 21, 1988, that he petitioner should be regarded as a miscellaneous financial company as defined under the relevant section. In such circumstances, it goes without saying that both the orders of the Income-tax Officer, i.e., on the rectification petitions and also the disallowance of interest payments in the concerned assessments is not correct and the same is against law and without jurisdiction. So also, this Court has already held that the orders of the first respondent on the revision petition are also not correct and it is against the provisions of the law and, therefore, liable to

Therefore, for all the aforesaid reasons and in the facts and circumstances of this case and also in view of my above discussions with regard to the various aspects of these cases, I am of the clear view that the petitioner herein has made out a clear case in his favour and that therefore, the orders impugned in these writ petitions are liable to be quashed and all these writ petitions be allowed as prayed for.

In the result, all these writ petitions are allowed as prayed for. No costs. Consequently, the orders impugned in these writ petitions are hereby quashed and the respondents herein are directed to delete the disallowance of interest under sections 40A(8)/58(2) of the Income-tax Act that has been made in the concerned assessments.

M.B.A./699/FC

Petitions allowed.