Faridabad Investment Company Limited Vs CIT (Calcutta High Court)- Rectification of an order does not mean obliteration of the order originally passed and its substitution by a new order. In The present case, we are of the firm opinion that there was no scope of rectification in the case on the ground of error apparent on the face of the record as the Assessing Officer even in his rectified order could not find out the actual expenditure for obtaining the dividend and calculated the same on the notional basis which is not permissible.
The position would have been different if from the materials on record, the actual expenditure of the assessee in obtaining the dividend was available. In such a situation, it would be permissible for the Assessing Officer to rectify the alleged mistake by deducting the actual expenditure available from the record. Thus, in the present case, the Assessing Officer exceeded his authority in invoking Section 154 of the Act and the Tribunal below committed substantial error of law in affirming the unauthorised act of the Assessing Officer.
Only the actual expenditure made in receiving the dividend should be deducted under s 80M and not a notional one based on average calculation.
Faridabad Investment Company Limited v CIT
High Court of Calcutta
I.T.A. No. 60 of 2004
Bhaskar Bhattacharya and Sambuddha Chakrabarti, JJ
Decided on: 13 July 2011
Bhaskar Bhattacharya, J.:
This appeal under Section 260A of the Income-tax (“Act”) is at the instance of an assessee and is directed against an order dated August 21, 2003 passed by the Income-tax Appellate Tribunal, “A” Bench, Kolkata, in Income-tax Appeal bearing ITA No. 1375(Kol)/2002 for the Assessment Year 1995-96 dismissing the appeal preferred by the assessee.
The facts giving rise to filing of this appeal may be summed up thus:
a) The appellant before us is a public limited liability company within the meaning of the Companies Act, 1956 and is assessed to tax under the Income-tax Act. The present appeal arises out of the assessment under the Act for the Assessment Year 1995-96 for which the relevant previous year was the Financial Year ended March 31, 1995. The appellant derives income from purchase and sale of and investment in shares, interest income, dividend income and rental income. For the Assessment Year 1995-96, the appellant filed a return on October 31, 1995 disclosing a total income of Rs. 35,09,420/-. The said return was processed under Section 143(1)(a) of the Act. Subsequently, notices under Sections 143(2) and 142(1) were issued. In support of the said return, the appellant submitted numerous details in course of the assessment proceedings which were duly verified and examined by the Assessing Officer. On May 21, 1997, the Assessing Officer passed an order under Section 143(3) determining the total income at Rs. 35,79,410/-. In the said assessment, the Assessing Officer allowed deduction under Section 80M of the Act in respect of the dividend of Rs.60,88,864/- received by the appellant. The Assessing Officer took note of the fact that the appellant had paid dividend of Rs.61, 10,000/- but the deduction under Section 80M was limited to the amount of dividend received.
b) On November 25, 1999, the Assessing Officer issued a notice under Section 154 of the Act proposing to rectify the said order of assessment. In the details of mistake appearing in the notice it was alleged that an error had been made in making allowance under Section 80M and the refund which was an apparent mistake. By a letter dated January 25, 2000, the appellant submitted its reply that deduction under section 80M was correctly allowed and there was no mistake to be rectified.
c) The Assessing Officer, however, by an order dated June 30, 2000 rectified the assessment order dated May 21, 1997. In the said order, the Assessing Officer held that allowance of deduction under Section 80M on dividend without deducting proportionate management expenses was a mistake apparent from the record. Such proportionate management expenses were notionally worked out in the annexure to the order as Rs.8,71,725/-. Accordingly, the deduction granted under Section 80M in the order dated May 21, 1997 was reduced by the said sum of Rs.8,71,725/-.
d) Being dissatisfied, the appellant preferred an appeal before the Commissioner of Income-tax (Appeals). The said appellate authority, by an order dated April 10, 2002, allowed the appeal by accepting the appellant’s contention that the action taken by the Assessing Officer was not permissible under Section 154 of the Act.
e) Being dissatisfied, the Revenue preferred an appeal before the Income-tax Appellate Tribunal and by the order impugned in this appeal, the Tribunal held that the Assessing Officer was bound to follow the judgment of the Honourable Supreme Court in the case of CIT Vs. United General Trust Ltd., reported in (1993) 200 ITR 488 while making the rectification. According to the Tribunal, it could not be held that no expenses were incurred for earning the dividend and thus, set aside the order of the Commissioner of Income-tax (Appeals).
f) Being dissatisfied, the appellant has come up with the present appeal.
A Division Bench of this Court at the time of admission of this appeal formulated the following substantial questions of law:
“i) Whether the question as to whether any expenditure was incurred for earning dividend income and if so, the quantum thereof could be gone into and decided in proceedings under Section 154 of the Income Tax Act, 1961 and the Tribunal was justified in law in upholding the order dated June 30, 2000 passed by the Assessing Officer under Section 154.
“ii) Whether in the facts and circumstances of this case the findings of the learned Tribunal rejecting the appellant’s contention that no expenditure was incurred for earning dividend income could be sustained on the mere presumption that there were certain expenditure and therefore a proportionate amount is to be allotted for the purpose of earning the dividend income which on facts appears to have been earned out of investment made long before and thus the finding is arbitrary, unreasonable and perverse.”
Mr. Khaitan, the learned Senior Advocate appearing on behalf of the appellant, has strenuously contended before us that the learned Tribunal below committed substantial error of law in reversing the order passed by the CIT(A) by not considering the scope of Section 154 of the Act. According to Mr. Khaitan, there was no scope of rectifying of the order by deducting the expenses under Section 80M of the Act on the basis of materials on record inasmuch as the Assessing Officer assessed the expenses on the basis of proportionate expenditure which is impermissible. According to Mr. Khaitan, even according to the law of the land, the deduction of expenditure under Section 80M of the Act must be the actual expenditure and not a proportionate one as done by the Assessing Officer. In support of his contention, Mr. Khaitan relies upon a Division Bench decision of this Court in the case of Commissioner of Income-tax Vs. United Collieries Ltd., reported in 2003 ITR 857 (CAL) whereby it was specifically held that the special deduction under Section 80M of the Act is allowable only on the net dividend which is arrived at after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. It was further pointed out that only the actual expenditure incurred by the assessee in earning the dividend income should be deducted from the dividend income and there is no scope for any estimate of expenditure being made and no notional expenditure could be allocated for the purpose of earing income.
By relying upon such decision, Mr. Khaitan contends that there was no mistake apparent on the face of record within the meaning of Section 154 of the Act inasmuch as the actual expenditure incurred by the appellant was not available on record and at the same time, the deduction of proportionate expenditure on notional basis was also illegal. Mr. Khaitan, therefore, prays for setting aside the order passed by the Tribunal below.
Mr. Nizamuddin, the learned Advocate appearing on behalf of the Revenue, on the other hand, supported the order passed by the Tribunal below and has contended that this Court within the narrow scope of Section 260A should not interfere with the discretion exercised by the Assessing Officer and affirmed by the Tribunal below. Mr. Nizamuddin, thus, prays for dismissal of the appeal.
Therefore, the only question that falls for determination in this appeal is whether the Tribunal below was justified in approving the order of rectification of the assessment notwithstanding the fact that no materials was available to indicate the actual expenditure of the appellant in getting the net dividend and the consequent benefit of deduction under Section 80 M of the Act and the order of rectification was not based on actual expenditure.
After hearing the learned counsel for the parties and after going through the materials on record we find that in the original return filed by the appellant there was no mention of any expenditure in getting the dividend. It was stated that the interim dividend to the extent of Rs. 47,00,000/- was paid on November 21, 1994 and the final dividend to the extent of Rs. 14,10,000/- was paid on January 9, 1995 but the appellant claimed Rs.60,88,864/- as deduction under Section 80M of the Act. In the original assessment order, the following observations have been made regarding the benefit of Section 80M of the Act:
“The Assessee has paid dividend of Rs.61,10,000/- but entitled for deduction limited to dividend earned i.e. Rs. 60,88,864/-.”
In the notice under Section 154 of the Act, the following details of mistake have been indicated:
“It is seen from the records while computing total income of the assessee, the error had been made making allowance u/s 80M and refund. Since, this apparent mistake and rectification u/s 154 is required.”
Ultimately, the Assessing Officer by relying upon the decision of the Supreme Court in the case of CIT Vs. United General Trust (P) Ltd (200 ITR 488) held that proportionate management expenses should be deducted from the dividend for calculation of the amount of deduction under Section 80M of the Act.
The calculation of the proportionate deduction done by the Assessing Officer is quoted below:
