The Commissioner of Income Tax, Trissur vs Paul John

Ramachandran Nair, J.—The question raised in the appeal filed by the Revenue is whether the Tribunal was justified in cancelling the order

issued by the Commissioner of Income tax u/s 263 of the IT. Act directing the assessing officer to disallow and bring to tax expenditure wrongly

claimed by the assessee and allowed in the original assessment as a deduction which is otherwise not allowable by virtue of the express provision

contained in Section 14A of the IT. Act. The deduction claimed by the assessee is interest paid on borrowed funds for investment in a partnership

firm where-from the assessee as partner got share income which is exempt from tax u/s 10(2) of the IT. Act. Admittedly the claim of deduction

made by the assessee and allowed by the officer is expressly prohibited by Section 10A which prohibits grant of deduction of any expenditure

incurred by the assessee in relation to any income which does not form part of the total income computed under the Act. Since the claim of

deduction was wrongly allowed, the order happened to be prejudicial to the interest of the revenue and therefore the Commissioner in exercise of

power u/s 263 of the Act set aside the assessment with direction to the assessing officer to revise the assessment for the purpose of withdrawing

deduction wrongly given and for levying tax thereon. When the assessee challenged order of the Commissioner in appeal before the Tribunal, the

Tribunal held that in view of the prohibition contained in the proviso to Section 14A prohibiting the assessing officer from reopening past

assessment for the purpose of disallowing the expenditure wrongly allowed, the Commissioner is also bound by the said prohibition and so much

so the order issued u/s 263 by the Commissioner is illegal and unsustainable. It is against this order of the Tribunal that the revenue has filed this

appeal. We have heard standing counsel appearing for the appellant-revenue and senior counsel Sri. Joseph Markose appearing for the

respondent-assessee. Section 14A introduced by Finance Act 2001 with retrospective effect from 1.4.1962 is as follows:

14A. For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the

assessee in relation to income which does not form part of the total income under this Act.

Provided that nothing contained in this section shall empower the assessing officer either to reassess u/s 147 or pass an order enhancing the

assessment or reducing a refund already made or otherwise increasing the liability of the assessee u/s 154, for any assessment year beginning on or

before the 1st day of April, 2001.

It is clear from the above proviso that even though the scheme of disallowance of expenditure incurred by the assessee in relation to income

exempted under the Act is introduced with retrospective effect from 1.4.1962, Parliament has chosen to implement the provision only from the

assessment year 2001-02 because express prohibition is introduced in the proviso against assessing officers reopening or rectifying assessments u/s

147 For u/s 154 for withdrawing deduction allowed in assessments concluded for periods prior to 1.4.2001. The contention of the standing

counsel is that prohibition introduced in the proviso is only against assessing officers from exercising their powers under Sections 147 and 154 of

the Act and since there is no restriction against Commissioner''s power u/s 263 he is free to invoke the same and disallow it, consistent with the

express provision contained in Section 14A, within the period of limitation provided therein. Senior counsel appearing for the respondent -

assessee on the other hand contended that the prohibition in the proviso is against reopening of concluded assessments for periods prior to

1.4.2001 and even though Commissioner''s authority u/s 263 is not expressly provided therein, the bar under the proviso applies to him as well.

We are of the view that the proviso to Section 14A is intended to provide finality for concluded assessments where deductions for earning

exempted income would have been allowed and therefore unless the proviso applies to Commissioner of Income tax as well, the purpose of the

proviso will be defeated. Further, in our view, the bar against the assessing officer passing an order enhancing the assessment stated in the proviso

takes in an order which the Officer may have to pass pursuant to the direction issued by the Commissioner u/s 263. Even though standing counsel

submitted that the proviso is applicable only to proceedings that can be issued by the assessing officer under Sections 147 and 154, we feel

besides the powers of the Officer under Sections 147 & 154, the assessing officer has the authority to increase the liability of the assessee pursuant

to orders issued u/s 263 by the Commissioner and pursuant to orders of enhancement which the Commissioner of Income tax (Appeals) can issue

u/s 251 (l)(a) while deciding the appeal tiled by the assessee. We therefore hold that the proviso to Section 14A prohibits all situations where the

Officer is otherwise entitled or required to revise an assessment which includes orders issued by the Commissioner u/s 263 or order of

enhancement issued by the CIT (Appeals) in exercise of his power above referred.

Consequently the appeal filed by the revenue is dismissed.