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Commissioner Of Income-Tax v. Seshasayee Paper Boards Limited
Factual and Procedural Background
The assessee, a company, claimed relief under section 80 of the Income-tax Act, 1961, for the assessment years 1972-73 and 1974-75 in respect of an industrial undertaking. Initially, the relief under section 80J was refused by the Income-tax Officer but was subsequently allowed in appeal by the Tribunal for 1972-73 and by the Appellate Assistant Commissioner for 1970-71 and 1974-75. While giving effect to these appellate orders, the Income-tax Officer followed the Madras High Court decision in Madras Industrial Linings Ltd. v. ITO, treating borrowed capital as part of the capital base for relief calculation.
Normally, a protective assessment would be made to keep the issue alive pending the Supreme Court's decision on the Madras High Court ruling. However, this practice was not followed. Instead, the Commissioner of Income-tax invoked jurisdiction under section 263 of the Act, issued a show-cause notice, and after hearing the assessee’s counsel, set aside the Income-tax Officer’s order granting relief, holding it erroneous and prejudicial to Revenue. The assessee appealed to the Appellate Tribunal, which held the Commissioner’s order unsustainable both on jurisdiction and merits.
Legal Issues Presented
- Whether the orders of the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961, for the assessment years 1972-73 and 1974-75 were valid in law?
Arguments of the Parties
Department's Arguments
- The Department sought to keep the matter alive pending the Supreme Court’s decision, as special leave had been granted against the Madras High Court’s judgment in Madras Industrial Linings Ltd. v. ITO.
- The usual practice of making a protective assessment was not followed, which caused the present dispute.
- The Supreme Court reversed the Madras High Court decision in Lohia Machines Ltd. v. Union of India, thus the relief granted by the Income-tax Officer was not legally justified.
- The Department relied on the Madras High Court decision in Commissioner Of Income-Tax v. Smt. Lakshmi Narayanan to support the proposition that revision proceedings under section 263 are valid to protect Revenue interests when earlier appellate orders are under challenge.
- On merits, the assessee is not entitled to relief already granted by the Income-tax Officer, as the relief was erroneous.
Assessee's Arguments
- The Income-tax Officer’s order, following the Madras High Court decision while giving effect to appellate orders, cannot be said to be erroneous or prejudicial to Revenue.
- Relied on Supreme Court decision in Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association and Allahabad High Court decision in K.N Agrawal v. Commissioner Of Income-Tax, contending that the present point was not decided therein.
- Argued that the Commissioner’s order under section 263 is invalid since the Income-tax Officer acted according to binding appellate decisions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Madras Industrial Linings Ltd. v. ITO, [1977] 110 ITR 256 | Treated borrowed capital as part of capital base for relief under section 80J | Decision was initially followed by Income-tax Officer but later overruled by Supreme Court; thus, relief based on this was erroneous. |
| Lohia Machines Ltd. v. Union of India, [1985] 152 ITR 308 (SC) | Overruled the Madras Industrial Linings Ltd. decision | Supreme Court decision applied to invalidate relief granted on the basis of Madras Industrial Linings Ltd. |
| Commissioner Of Income-Tax v. Smt. Lakshmi Narayanan, [1986] 157 ITR 816 (Madras HC) | Revision proceedings under section 263 valid to protect Revenue interests when earlier appellate orders are under challenge | Used to support the validity of the Commissioner’s revision order in the present case. |
| Commissioner Of Income-Tax, Tamil Nadu-I v. Smt. Lakshmi Narayan, [1981] 132 ITR 355 | High Court decision held to be declaratory and valid as law on the date of revision notice under section 263 | Reinforced the principle that revision can be valid even if High Court decision is subsequent to Tribunal’s order. |
| Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association, [1980] 121 ITR 1 (SC) | General principles on revision under section 263 | The court did not find this decision directly applicable to the present point. |
| K.N Agrawal v. Commissioner Of Income-Tax, [1991] 189 ITR 769 (Allahabad HC) | General principles on revision under section 263 | The court did not find this decision directly applicable to the present point. |
Court's Reasoning and Analysis
The court examined the validity of the Commissioner of Income-tax’s order under section 263, which set aside the Income-tax Officer’s relief granted under section 80J. The court noted that the Income-tax Officer had followed the Madras High Court decision in granting relief, but this decision was subsequently overruled by the Supreme Court in Lohia Machines Ltd. v. Union of India. The court emphasized the usual practice of making a protective assessment to keep the matter alive pending the Supreme Court’s ruling, which was not followed here. The Commissioner’s intervention was thus justified to protect Revenue interests.
The court also referred to the Madras High Court’s decision in Commissioner Of Income-Tax v. Smt. Lakshmi Narayanan, which upheld the validity of revision proceedings under similar circumstances. The court rejected the assessee’s reliance on other decisions that did not address the specific issue at hand and reaffirmed that a High Court decision is declaratory and should be treated as the law as of the date the revision notice is issued.
Accordingly, the court concluded that the Commissioner’s order under section 263 was valid both in jurisdiction and merits, as the relief granted was erroneous and prejudicial to Revenue.
Holding and Implications
The question referred under section 256(1) of the Income-tax Act is answered in the affirmative and in favor of the Department.
This means the orders passed by the Commissioner of Income-tax under section 263, setting aside the relief granted under section 80J for the assessment years 1972-73 and 1974-75, are valid both on jurisdictional and substantive grounds. The decision directly affects the parties by affirming the Commissioner’s power to revise such orders to protect Revenue interests pending higher court decisions. No broader precedent beyond the case facts is established.
There is no order as to costs.
K.A Thanikkachalam, J.:— Under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the Tribunal referred the following question for our opinion:
“Whether, on the facts and in the circumstances of the case, the orders of the Commissioner of Income-tax purportedly passed under section 263 of the Income-tax Act, 1961, for the assessment years 1972-73 and 1974-75 were valid in law?”
2. The assessee is a company which had claimed relief under section 80 of the Act in respect of an industrial undertaking for the assessment years 1972-73 and 1974-75. The relief claimed under section 80J of the Act was initially refused by the Income-tax Officer, but it was allowed in appeal by the Tribunal for the assessment year 1972-73 and by the Appellate Assistant Commissioner for the assessment years 1970-71 and 1974-75.
3. While giving effect to these appellate orders, the Income-tax Officer followed the decision of the Madras High Court in Madras Industrial Linings Ltd. v. ITO, [1977] 110 ITR 256 and treated the borrowed capital as part of the capital base in arriving at the extent of the relief.
4. In a matter like this, it was pointed out, that it is the usual practice to make a protective assessment. When the decision of the Madras High Court was taken up to the Supreme Court by way of special leave petition, if the protective assessment was made, the demand would have been stayed and the final order on appeal would have been consistent with the Supreme Court decision. In other words, the issue would be kept alive till the Supreme Court rendered its decision on a particular point. This procedure was not followed in the present case. The Commissioner of Income-tax exercised his jurisdiction under section 263 of the Act in order to keep the matter alive. After giving a show-cause notice and after hearing learned counsel appearing for the assessee, the Commissioner of Income-tax held that the relief granted by the Income-tax Officer under section 80J of the Act in the assessment years under consideration is erroneous and prejudicial to the interests of the Revenue. Accordingly, the order passed by the Income-tax Officer in granting relief under section 80J of the Act was set aside. As against this order, the assessee went in appeal before the Appellate Tribunal. The Appellate Tribunal held that the order passed by the Commissioner of Income-tax under section 263 of the Act is unsustainable both on the question of jurisdiction as well as on the merits.
5. Learned standing counsel appearing for the Department, submitted before this court as under:
All that the Department wanted was to keep the matter alive so that the final order passed by the Department would be in accordance with the judgment of the Supreme Court since special leave has been granted against the judgment of the Madras High Court in Madras Industrial Linings Ltd. v. ITO, [1977] 110 ITR 256 (Mad). According to learned standing counsel, had the Income-tax Officer made a protective assessment as per the practice prevalent then, the present contingency would not have arisen, because, after the judgment of the Supreme Court is known, the order would have been passed in accordance with the order passed by the Supreme Court. It was further pointed out that, in the present case, the decision of the Madras High Court in Madras Industrial Linings Ltd. v. ITO, [1977] 110 ITR 256, followed by the Income-tax Officer was reversed by the Supreme Court in Lohia Machines Lid. v. Union of India, [1985] 152 ITR 308.
6. According to learned standing counsel, even on the merits, the assessee is not entitled to any relief which was already granted by the Income-tax Officer. In support of the contention that the matter should be kept alive when as against a decision of this court, the Supreme Court granted special leave and if this practice was not followed, that would cause prejudice to the interests of the Revenue, learned standing counsel relied upon the decision of the Madras High Court in Commissioner Of Income-Tax v. Smt. Lakshmi Narayanan, [1986] 157 ITR 816. According to the facts arising in that case, the assessee's claim that she was liable to tax only in relation to 1/7th of the share income from a firm and not on the entire income for the assessment years 1970-71 and 1971-72 was not accepted, by the Income-tax Officer, but upheld by the Tribunal. Based on the said decision of the Tribunal, the Income-tax Officer, for the year 1973-74, assessed only 1/7th of the income in the assessee's hands. The Commissioner of Income-tax, however, revised this order of the Income-tax Officer for 1973-74 on the ground that it was prejudicial to the Revenue. The Tribunal held that since the notice proposing to revise the order of the Income-tax Officer was issued at a stage when the order of the Tribunal for the earlier period held the field, the revision proceedings could not be sustained and accordingly set aside the order of the Commissioner of Income-tax.
7. On a reference, this court held that, “in view of the order of the Tribunal for the earlier years 1970-71 and 1971-72 having been subsequently set aside by the High Court in Commissioner Of Income-Tax, Tamil Nadu-I v. Smt. Lakshmi Narayan, [1981] 132 ITR 355, the notice proposing to revise the order of the Income-tax Officer issued by the Commissioner of Income-tax was valid. Though the said decision of the High Court was in fact subsequent to the order of the Tribunal setting aside the order of the Commissioner of Income-tax, the said decision should be taken to be declaratory and should be taken to be the law on the date when the notice to revise the assessment was issued by the Commissioner of Income-tax. The revision of the assessment by the Commissioner of Income-tax was, therefore, in order”. It was, therefore, submitted that the order passed by the Commissioner of Income-tax under section 263 of the Act in the present case is in order and the Tribunal has no basis to set aside the said order relying upon the decision of the Madras High Court in Madras Industrial Linings Ltd. v. ITO, [1977] 110 ITR 256, as against which, special leave was granted.
8. On the other hand, learned counsel appearing for the assessee contended that when the Income-tax Officer while passing a consequential order in pursuance of the order passed by the Appellate Assistant Commissioner, followed a decision of the Madras High Court on a particular point, it cannot be said that the said order is erroneous and prejudicial to the interests of the Revenue. In support of this contention, reliance was placed on the decision of the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association, [1980] 121 ITR 1 and another decision of the Allahabad High Court in K.N Agrawal v. Commissioner Of Income-Tax., [1991] 189 ITR 769. In both the abovesaid decisions, the present point, as mooted out in the instant case, was not the subject-matter for decision. Therefore, we are unable to follow those decisions cited by learned counsel appearing for the assessee. Inasmuch as there is a direct decision of this court on this point, viz., that the judgment rendered by the High Court would be declaratory and should be taken to be the law on the date when the notice under section 263 of the Act was issued, we are unable to subscribe to the submissions made by learned counsel appearing for the assessee. As already pointed out, in Lohia Machines Ltd. v. Union of India, [1985] 152 ITR 308 (SC), the decision rendered by this court in Madras Industrial Linings Ltd. v. ITO, [1977] 110 ITR 256, was overruled. Hence, the assessee is not entitled to get the relief asked for, viz., while calculating the capital base under section 80J of the Act, the borrowed capital should also be taken into consideration. Therefore, the order passed by the Commissioner of Income-tax under section 263 of the Act is valid both in respect of the jurisdictional aspect as well as on the merits. Under such circumstances, we answer the question referred to us in the affirmative and in favour of the Department. However, there will be no order as to costs.
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