KANOI INDUSTRIES (P) LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2005-LL-1114-6]

Citation 2005-LL-1114-6
Appellant Name KANOI INDUSTRIES (P) LTD.
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 14/11/2005
Assessment Year 1993-94 to 1995-96
Judgment View Judgment
Keyword Tags admission of additional grounds of appeal • public financial institution • initiation of reassessment • opportunity of being heard • income chargeable to tax • reopening of assessment • banking regulation act • assessment proceeding • recording of reasons • statutory obligation • memorandum of appeal • interest chargeable • business of banking • principal business • issuance of notice • credit institution • extension of time • financial company • reason to believe • judicial decision • audited accounts • audit objection
Bot Summary: The original grounds taken by the assessee are as under: For that on the facts and circumstances of the case, the learned CIT(A) has erred in confirming the order passed by the AO under s. 8(2)/10 of the Interest-tax Act, when the same is liable to be cancelled. The assessee thereafter filed the following additional grounds of appeal common to all the assessment years under appeal: That the action of initiating proceeding under s. 10 on the alleged ground of escapement of interest chargeable to tax, is bad in law. The AO passed the orders under s. 8(2)/10 of the Interest-tax Act, 1974, reopening and reassessing the interest-tax chargeable on the assessee and thereby imposing liability on the assessee of Rs. 17,04,478, Rs. 13,00,319 and Rs. 11,30,938, respectively for the asst. The relevant provisions are contained in s. 10 which are reproduced below: The AO has reason to believe that by reason of the omission or failure on the part of the assessee to make a return under s. 7 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for any assessment year, chargeable interest for that year has escaped assessment or has been underassessed or has been made the subject of excessive relief under this Act, or Notwithstanding that there has been no omission or failure as mentioned in cl. 1993-94 has escaped from assessment, a notice under s. 10 of the Interest-tax Act, 1974, was issued on 9th Nov., 1998, to the assessee requiring him to file a return under s. 7 of the Interest-tax Act. Non-objection to assumption of jurisdiction under s. 10 in the course of assessment proceeding will not validate the issuance of notice under s. 10, an argument advanced by the learned counsel. The results shown in these years, as per audited accounts, are given below: Assessment year Gross sales Gross interest -94 Rs. 4,06,38,157 Rs. 1,35,92,353 -95 Rs. 1,38,65,746 Rs. 1,17,14,605 -96 Rs. 1,81,71,787 Rs. 1,17,13,969 On perused of the said picture of the assessee s business, it is evident that the assessee s business other than earning of interest on advancing loans and advances was comparatively high in all the three assessment years under appeal.


KOLKATA D BENCH DEPUTY KANOI INDUSTRIES (P) v. COMMISSIONER OF LTD. INCOME TAX November 14, 2005 JUDGMENT ORDER r.p. rajesh, a.m.: These three appeals of assessee are directed against consolidated order of CIT(A), Circle-I, Kolkata, dt. 20th Feb., 2004. As issues involved in all these appeals are identical, these appeals of assessee are heard together and are being disposed of by this common order for sake of convenience. original grounds taken by assessee are as under: "(i) For that on facts and circumstances of case, learned CIT(A) has erred in confirming order passed by AO under s. 8(2)/10 of Interest-tax Act, when same is liable to be cancelled. (ii) For that appellant begs leave to add, alter or amend any of grounds of appeal at time of hearing." assessee thereafter filed following additional grounds of appeal common to all assessment years under appeal: "(i) That action of initiating proceeding under s. 10 on alleged ground of escapement of interest chargeable to tax, is bad in law. (ii) That learned AO erred in having entertained this belief without holding that assessee is credit institution falling within ambit of s. 2(5A) or 2(5B) of Interest-tax Act, 1974. (iii) That learned AO further erred in having computed chargeable interest without setting off interest paid for earning of such interest received and thereby wrongly calculated chargeable interest at Rs. 1,17,13,969. (iv) That orders of learned AO and CIT(A) being bad for lack of jurisdiction, same should be declared as bad in law and annulled." We shall first take up issue regarding admission of additional grounds of appeal, reproduced above, raised by assessee. According to learned counsel of assessee, these additional grounds are legal issues and no new facts which are not on record, are involved in these additional grounds. AO passed orders under s. 8(2)/10 of Interest-tax Act, 1974 (the Act), reopening and reassessing interest-tax chargeable on assessee and thereby imposing liability on assessee of Rs. 17,04,478, Rs. 13,00,319 and Rs. 11,30,938, respectively for asst. yrs. 1993-94 to 1995-96, which were confirmed by CIT(A). He thus contended that assessee is entitled to relief being claimed by way of additional grounds, sought to be substituted for original ground and same can be disposed of on basis of material on record accordingly inasmuch as same is also germane to issue of computation of assessee s income in proper and correct manner. In support of his contentions, learned assessee s counsel has cited decision of Hon ble Supreme Court in case of National Thermal Power Co. Ltd. vs. CIT (1999) 157 CTR (SC) 249: (1998) 229 ITR 383 (SC). He has also relied on order of Mumbai "J" Bench of Tribunal in case of M/s Datamatics Ltd., copy of which has been filed before us. On other hand, learned Departmental Representative vehemently opposed admission of these additional grounds and submitted that issues raised in additional grounds were not raised either in assessment proceedings or at appellate proceedings before learned CIT(A). In this regard, she referred to assessment order and submitted that instead of objecting assumption of jurisdiction under s. 10 of Interest-tax Act, assessee sought extension of time for filing Interest-tax return. Therefore, learned Departmental Representative submitted that jurisdiction under s. 10 was correctly assumed by AO and that issue cannot be raised by taking additional ground, therefore, these additional grounds which are new should not be admitted at this stage. In this regard learned Departmental Representative placed reliance on decision of Third Member in case of Rameshwar Lal Soni vs. Asstt. CIT (2004) 85 TTJ (Jd)(TM) 553: (2004) 91 ITD 301 (Jd)(TM). In short counter, learned counsel submitted that decision will not be applicable in present case as because that was case of Third Member in which law enjoins that learned Third Member is required to decide specific issue raised before him. In this view of matter Tribunal has taken view that no addition ground can be taken, thus, ratio of decision comes to help of Revenue. We have heard rival submissions of parties and we have perused decisions on which reliance is placed from both sides. Tribunal while dealing with subject-matter of appeal in exercise of its power, it may allow party to take up new ground of appeal. In other words, Tribunal has power to permit assessee to raise new ground of appeal, not set forth in memorandum of appeal, even without formal amendment of grounds set forth in memorandum of appeal provided that new ground does not involve further investigation into facts. This power of Tribunal is spelt out in r. 11 of ITAT Rules, 1963. Hon ble Punjab & Haryana High Court has held in case of Vijay Kumar Jain vs. CIT (1975) 99 ITR 349 (P&H) that Tribunal may allow party to press ground which he does not press before first appellate authority although he has taken and included in grounds of first appeal. proposition of law on issue of admission of additional or new grounds by first appellate authority was laid down by Hon ble Supreme Court in case of Jute Corporation of India Ltd. vs. CIT (1990) 88 CTR (SC) 66: (1991) 187 ITR 688 (SC) and Hon ble Supreme Court in case of National Thermal Power Co. Ltd. vs. CIT (supra) held that same will apply to appeal before Tribunal Hon ble Allahabad High Court in case of CIT vs. Mohd. Ayyub & Sons Agency (1992) 197 ITR 637 (All) has held that power of Tribunal to permit any party to appeal to raise question of jurisdiction, which goes to root of matter and does not involve further investigation into facts, cannot be disputed on plain reading of r. 11 of ITAT Rules, 1963. Indeed on such plea being taken, Tribunal is under statutory obligation not only to entertain plea but also to decide same after providing sufficient opportunity of being heard to other side. Similar views have been taken by Hon ble Delhi High Court (i) in case of CIT vs. Mahalaxskh Sugar Mills Co. Ltd. (1993) 200 ITR 275 (Del), (ii) Hon ble Bombay High Court in case of Ahmedabad Electricity Co. Ltd. vs. CIT (1992) 106 CTR (Bom) 78: (1993) 199 ITR 351, 367 (Bom) and (iii) Hon ble Rajasthan High Court in case of Mewar Sugar Mills Ltd. vs. CIT (1993) 203 ITR 415 (Raj). Hon ble Bombay High Court in case of Baby Samuel vs. Asstt. CIT (2003) 184 CTR (Bom) 140: (2003) 262 ITR 385 (Bom) has held that when issue was not specifically taken in memorandum and grounds of appeal but mentioned in written submissions filed before Tribunal and specifically argued at time of final hearing of appeal, Tribunal cannot refuse to adjudicate upon that issue on merits of ground that no such ground has been taken specifically in grounds of appeal. Hon ble Supreme Court in case of National Thermal Power Co. Ltd. (supra) has held: " .The power of Tribunal in dealing with appeals is thus expressed in widest possible terms. purpose of assessment proceedings before taxing authorities is to assess correctly tax liability of assessee in accordance with law. If, for example, as result of judicial decision given while appeal is pending before Tribunal, it is found that non-taxable item is taxed or permissible deduction is denied, there is no reason why assessee should be prevented from raising that question before Tribunal for first time, so long as relevant facts are on record in respect of item. There is no reason to restrict power of Tribunal under s. 254 only to decide grounds which arise from order of CIT(A). Both assessee as well as Department have right to file appeal/cross-objections before Tribunal. Tribunal should not be prevented from considering questions of law arising in assessment proceedings, although not raised earlier. view that Tribunal is confined only to issues arising out of appeal before CIT(A) is too narrow view to take off powers of Tribunal." Thus, settled legal position, which emerges from aforesaid judicial pronouncements, is that purpose of assessment proceeding is to tax/assess taxable liability/income of assessee correctly in accordance with law and if assessee is entitled to certain relief, deduction or benefit, assessee should not be denied or deprived of it, even if claim pertaining to same is made for first time before Tribunal during pendency of appeal before it. In present case, issues raised in additional grounds are legal issues which go to root of matter and for deciding these legal issues no new facts are required to be considered as all facts are already recorded in orders of authorities below. In this view of matter, we do not find any force in contention of learned Departmental Representative that assumption of jurisdiction was not challenged before AO, therefore, jurisdiction was correctly assumed by AO under s. 10 of Interest-tax Act. We are also unable to concede to request of learned Departmental Representative that matter may be restored for reverification and fresh adjudication on legal issues in view of our above discussion on issue of scope and ambit of power of Tribunal to admit additional/new grounds. Accordingly, we admit additional grounds taken by assessee and we shall now proceed to dispose of issues raised in additional grounds. first issue raised in additional ground No. 1 is against initiation of proceedings under s. 10 of Interest-tax Act for reopening of assessment. learned counsel submitted that before forming belief that chargeable income has escaped assessment, AO should have first decided status of assessee-company whether it is credit institution or financial company or otherwise. He further submitted that determination of status is foremost issue to be decided first to attract provisions of Interest-tax Act. learned counsel submitted that from reasons recorded, it is clear that there is admittedly no mention about such finding which has also been fairly conceded by learned Departmental Representative. Therefore, learned counsel concluded that from basis, on which impugned assessment has been framed, is without any leg. learned counsel also pointed out that in this case AO has initiated proceeding under s. 10 of Interest-tax Act merely on basis of audit objection and various decisions of Hon ble Courts that reassessment proceeding cannot be started merely on basis of audit objection. learned counsel has also enclosed copy of audit objection in paper book. We have considered submissions and we have also perused various papers placed in paper book. relevant provisions are contained in s. 10 which are reproduced below: (a) AO has reason to believe that by reason of omission or failure on part of assessee to make return under s. 7 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for any assessment year, chargeable interest for that year has escaped assessment or has been underassessed or has been made subject of excessive relief under this Act, or (b) Notwithstanding that there has been no omission or failure as mentioned in cl. (a) on part of assessee, AO has, in consequence of information in his possession, reason to believe that chargeable interest assessable for any assessment year has escaped assessment or has been underassessed or has been subject of excessive relief under this Act." From analysis of above provisions, it is clear that it is pre-requisite that AO should record reasons to effect that interest income has escaped assessment under Interest-tax Act, 1974. While recording reasons AO must have reasons to believe on basis of material available with him that income chargeable to tax has escaped assessment. There has to be direct nexus between formation of belief and availability of material. It is now settled law that unless all requisite conditions for assumption of jurisdiction for reassessment purposes under provisions of Direct Tax Act are satisfied, assumption of jurisdiction will be invalid and entire reassessment proceeding would become non est. Further, for assumption of such jurisdiction, issuance of valid notice is must which again pre-requisites recording of reasons for formation of belief by AO about escapement of income from assessment. In present case, it is obvious that proceeding under s. 10 of Interest-tax Act was initiated by Department merely on basis of observation of audit objection as audit objection was intimated to Department on 12th March, 1998, and notice under s. 10 was issued on 9th Nov., 1998, learned Departmental Representative did not contradict this assumption, by bringing any material or evidence. relevant portion of audit observation is reproduced below: "Ms/ Kanoi Industries (P) Ltd. Private Company/Resident CT-9645 Asst. yrs. 1993-94, 1994-95 and 1995-96 While checking income-tax assessment records for asst. yrs. 1994- 95 and 1995-96 which were assessed under s. 143(3) on 27th March, 1997, and under s. 143(1)(a) on 3rd Sept., 1996, at Rs. 60,74,930 and Rs. 2,43,220, respectively, it was noticed that assessee earned interest against loans and advances from different parties amounting to Rs. 1,17,14,605 and Rs. 1,17,13,969 during financial years 1993-94 and 1994-95, respectively. Under Interest-tax Act, interest-tax is leviable on chargeable interest income of credit institution, such credit institution, inter alia, include co-operative societies engaged in business of banking, not being co- operative societies which provide credit facilities to formers or village artisans. interest income chargeable to tax includes interest on loans and advances, commitment charges on unutilised portion of any credit sanctioned and discount on promissory notes, and bills of exchange. return of chargeable interest is required to be filed by 31st December of relevant assessment year." From above observation of audit party, it is seen that it has raised issue which is purely legal issue and it is almost settled proposition that opinion of audit party on any point of law cannot be regarded as "information" occurring in relevant s. 10 of Interest-tax Act, 1974. In case of Indian & Eastern Newspaper Society vs. CIT (1979) 12 CTR (SC) 190: (1979) 119 ITR 996, 997 (SC), Hon ble Supreme Court has observed that: " ..In every case, ITO must determine for himself what is effect and consequence of law mentioned in audit note and whether in consequence of law which has now come to his notice he can reasonably believe that income has escaped assessment. basis of his belief must be law of which he has now become aware. opinion rendered by audit party in regard to law cannot, for purpose of such belief, add to or colour significance of such law. true evaluation of law in its bearing on assessment must be made directly and solely by ITO." Even for sake of argument, it is taken that audit observation will form basis of initiation of reassessment proceeding, in present case, audit party has simply observed that "under Interest-tax Act, Interest-tax is leviable on chargeable interest income of credit institution , inter alia ." Audit report is silent on issue whether appellant-company is "credit institution" determination of which is pre-requisite for assumption of jurisdiction under s. 10 of Interest-tax Act. Therefore, it was incumbent upon AO, after receiving audit report, to ascertain whether assessee falls in category of "credit institution", but same was not done and in most mechanical manner, jurisdiction was assumed and notice under s. 10 was issued. It is obvious from assessment order itself. relevant portion is reproduced below: "The interest was earned by assessee-company from loans and advances given to different parties. With reason to believe that chargeable interest for asst. yr. 1993-94 has escaped from assessment, notice under s. 10 of Interest-tax Act, 1974, was issued on 9th Nov., 1998, to assessee requiring him to file return under s. 7 of Interest-tax Act." assumption of jurisdiction must have legal sanction. Non-objection to assumption of jurisdiction under s. 10 in course of assessment proceeding will not validate issuance of notice under s. 10, argument advanced by learned counsel. Even consent does not confer jurisdiction. It is so because initiation can validly be made strictly in circumstances and manner specified. Reference may be made to decision of Gujarat High Court in case of P.V. Doshi vs. CIT (1978) 113 ITR 22 (Guj) and decision of Allahabad High Court in case of CIT vs. Hari Raj Swarup & Sons (1982) 29 CTR (All) 276: (1982) 138 ITR 462 (All). In our considered opinion, in present case, jurisdiction under s. 10 has not been validly assumed, hence issue of notice is bad in law as there is no nexus between formation of belief and material available which is clear from facts mentioned hereinabove. Since initiation of proceeding itself is bad in law and invalid, whatever follows thereafter must also necessarily be invalid as it was held in case of Rawatmal Harakchand vs. CIT 1978 CTR (Cal) 157: (1981) 129 ITR 346 (Cal). Consequently, assessment orders passed in this case also are bad in law and invalid. Now, coming to second issue raised in additional ground, i.e., whether assessee falls in category of credit institution falling within ambit of s. 2(5A) and 2(5B) of Interest-tax Act, 1974? learned counsel submitted that s. 4 of Interest-tax Act is charging section. Sub-s. (2) of this section provides that there shall be charged on every credit institution/finance company for every assessment year commencing on and from 1st day of April, 1992, interest-tax in respect of its chargeable interest of previous year @ 3 per cent of such chargeable interest. learned counsel continued and submitted that it is clear that only credit institutions are liable to interest-tax on chargeable interest earned during previous year. learned counsel also submitted that in asst. yr. 1992-93 no such proceeding was initiated. learned counsel further submitted that to attract Interest-tax Act it is to be determined whether assessee is credit institution or financial company. On perusal of assessment order, it is amply clear that there is no such finding recorded, except merely recording of alleged belief that assessee-company earned interest income and there was escapement of chargeable interest on said interest earned on loans and advances. learned counsel thereafter referred to provisions of sub-s. (5A) of s. 2 which defines category under which company can be treated as credit institution . Similarly, s. 2(5B) which defines meaning of financial company and cl. (iv) of section clarifies that company which carries on, as its principal business , business of providing finance, whether by making loans or advances or otherwise shall come under this definition. learned counsel invited our attention to audited accounts for three years under appeal to strengthen his arguments that principal business of assessee-company was not that of as credit institution or financial company. He submitted that assessee was engaged in business of jute, cloth, tea, shares and advancing of loans and advances computed under head Income from other sources . income from these businesses, other than that of interest on loan, was far more than earnings from interest on advances made. Therefore, "principal business" was not that of financing business. learned counsel further argued that AO has tried to assume jurisdiction without application of mind and against established principle of law. learned counsel has also drawn our attention to decision of Kolkata Bench "C" in case of Mahaan Impex Ltd., copy of which has been filed and submitted that in this decision procedure has been enumerated to determine concept principal business . Thus, learned counsel submitted that on merit also Revenue has got no case. On other hand, learned Departmental Representative reiterated submission that since new issue has been raised at this stage, matter can be set aside and restored to file of AO to consider issue afresh. We have considered submissions made from both sides. issue to be decided before us is whether assessee falls under category of "credit institution". Under Interest-tax Act, 1974, charging section is s. 4. It is relevant to reproduce provisions of s. 4, same is reproduced below: "(1) Subject to provisions of this Act, there shall be charged on every scheduled bank for every assessment year commencing on or after 1st day of April, 1975, tax (in this Act, referred to as interest-tax) in respect of its chargeable interest of previous year at rate of seven per cent of such chargeable interest: Provided that rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after 31st day of March, 1983, shall be three and half per cent of such chargeable interest. (2) Notwithstanding anything contained in sub-s. (1) but subject to other provisions of this Act, there shall be charged on every credit institution for every assessment year commencing on and from 1st day of April, 1992, interest-tax in respect of its chargeable interest of previous year at rate of three per cent of such chargeable interest: Provided that rate at which interest-tax shall be charged in respect of any chargeable interest accruing or arising after 31st day of March, 1977, shall be two per cent of such chargeable interest. (3) Notwithstanding anything contained in sub-ss. (1) and (2), no interest- tax shall be charged in respect of any chargeable interest accruing or arising after 31st day of March, 2000." Now, it is clear from provisions of charging section that interest-tax is leviable on every credit institution and credit institution is defined in s. 2(5A), same is reproduced below: "(i) banking company to which Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in s. 51 of that Act; (ii) public financial institution as defined in s. 4A of Companies Act, 1956 (1 of 1956); (iii) State Financial Corporation established under s. 3 or s. 3A or institution notified under s. 46 of State Financial Corporations Act, 1951 (63 of 1951); and (iv) any other financial company;" Now, from meaning of credit institution, we find that includes other financial company and term financial company is defined in sub-s. (5B) of s. 2 and it includes in its meaning 7 categories of companies. relevant category for consideration is cl. (iv) of s. (5B) which is as under: "(iv) loan company, that is to say, company [not being company referred to in sub-cls. (i) to (iii)] which carries on as its principal business, business of providing finance, whether by making loans or advances or otherwise;" On close reading of aforesaid provisions of Act, we find that clause includes particular company in its definition of financial company only when company carries on business of that nature as its "principal business". From audited accounts of assessee-company for these assessment years, which have been placed on record, we find that main objects of assessee are to carry on business in jute, cloth, tea, shares and to undertake financing and loaning activities other than any non-banking business as defined under Banking Regulation Act, 1949. results shown in these years, as per audited accounts, are given below: Assessment year Gross sales Gross interest -94 Rs. 4,06,38,157 Rs. 1,35,92,353 -95 Rs. 1,38,65,746 Rs. 1,17,14,605 -96 Rs. 1,81,71,787 Rs. 1,17,13,969 On perused of said picture of assessee s business, it is evident that assessee s business other than earning of interest on advancing loans and advances was comparatively high in all three assessment years under appeal. On basis of these facts before us main question which has to be decided by us is whether company can be called company whose principal business is that of granting of loans and advances. Admittedly, phrase principal business has not been defined anywhere in Act. What constitutes principal business will, therefore, depend upon facts and circumstances of each case. In that situation, past history of assessee, current business of assessee, break-up of income earned during relevant year will all help in determining principal business of assessee-company. As has been stated earlier, reopening of assessment was not made for asst. yr. 1992-93. It is only from asst. yr. 1993-94 that AO entertained belief that assessee earned substantial interest out of loans and advances and thus liable to pay interest-tax on such interest income. In asst. yr. 1993-94, total sales were amounted to over Rs. 4 crores as against gross interest earned of Rs. 1.35 crore. In subsequent two years, sales were higher than interest income earned by assessee. Therefore, in view of above facts and discussion we hold that appellant does not fall under category of "credit institution". very charging s. 4 is not attracted in case of appellant, hence, interest-tax is not leviable in case of appellant and appellant is not required to file Interest-tax return. Thus, on merit also, we are unable to uphold orders of authorities below and same are quashed. In view of our above decision and findings, other grounds taken by assessee will be infructuous and hence dismissed. As result, all appeals filed by assessee are allowed as indicated above. *** KANOI INDUSTRIES (P) LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
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