[ITR] 263, Revision by Commissioner of Income Tax

Whether when assessee lends colour of business income to dividend declared as 'income from other sources' in previous year, and AO allows set-off of brought forward losses, it is a fit case for CIT to invoke revisionary powers - YES: Delhi HC

NEW DELHI, MAY 20, 2011: THE issue before the High Court is - Whether when assessee lends colour of business income to dividend income declared as 'income from other sources' in the previous year and AO allows set off of brought forward losses against such income, it is a fit ground for CIT to invoke revisionary powers u/s 263. YES is the HC's answer.

Facts of the case

CIT rightly initiated proceedings u/s 263 for setting off of brought forward business loss against the income from other sources by the AO, without giving the reason by the AO in the assessment order as to how the dividend income was given the character of business income for the purpose of set off under Section 72 of the Act though the dividend income was assessed as income from other sources, as it was prejudicial to the interest of revenue and erroneous.

Assessee is a non-banking company registered with the Reserve Bank of India, and is engaged in the business of investment in shares, securities, other debt instruments and financing loans and providing guarantees. Assessee claimed dividend income received as business income and set off the brought forward business losses. AO treated the dividend income as income from other sources as was itself shown by the assessee in the preceding years and allowed set off of losses. CIT observed that the AO had wrongly allowed the set off of business losses of preceding years against the income from other sources which was not permissible under section 72(1). Accordingly CIT initiated proceedings u/s 263 stating that the AO did not bestow any consideration or applied his mind leading to escapement of income as setting off of brought forward business losses had resulted in the assessment which was erroneous and prejudicial to the interest of revenue. In reply to the show cause notice issued by CIT, the assessee contended that assessee was engaged in the business of investment and was holding the shares of other companies of the same group. Investment was meant for control and management of investee companies. The shares constituted the business asset of the company and dividend earned from such investment was in nature of `business income' and this income was eligible for set off against the brought forward business losses. CIT set aside the order of the AO for fresh consideration stating that the investments were held as long-term investment and no part of the investment was considered stock-in-trade by the assessee. Therefore, the AO failed to conduct the required enquiry and also failed in application of the provisions of S. 72(1). ITAT allowed the appeal of the assessee and set aside the order of CIT observing that the said income could be treated as business income as dividend was earned from the shares and securities held in the other companies in the same group – the view of the AO was a plausible view and it could not be said that the AO had not applied his mind.

After hearing both the parties, the High Court held:

++ that it would be immaterial as to under what head specified under Section 14 of the Act that the income is computed. Even when it is not computed under the head 'income from profession and business', the commercial character of that income could still be taken into account. If it is found that the particular income was derived from the business of the assessee, for the purposes of set off, it can be taken as business income;

++ that in the assessment order, the AO recorded that even a dividend income in question was shown as business income by the assessee. The AO did not agree with the same, as in the previous years this income was shown as dividend income. After saying so, the AO straightaway allowed the set off of this income against the carry forward losses. The assessment order is totally silent and there is no discussion as to how this dividend income was to be given the character of business income for the purpose of set off under Section 72 of the Act. It was for this reason that the CIT held that the AO had not conducted any inquiry. ITAT did not appreciate that the AO had not even taken any view on this issue, it could not be said that the AO had not applied his mind;

++ that the Tribunal failed to appreciate the limited scope of appeal before it, viz., the validity of the order passed by the CIT exercising his revisionary power under Section 263 of the Act. The CIT recorded that the Assessing Officer had failed to conduct the required enquiry and also had failed in application of the provisions of Section 72 (1) of the I.T. Act. This rendered order passed by the AO erroneous and prejudicial to the interest of Revenue to that extent. The Tribunal was, thus, supposed to adjudge the validity of such an order and not to go beyond when the challenge before it was limited to the said order passed by CIT in exercising the powers under Section 263 of the Act.

Revenue's appeal allowed .