COMMISSIONER OF INCOME TAX Vs. NALWA INVESTMENTS LTD

JUDGEMENT

(1.) The assessment order passed by the Assessing Officer (AO) in respect of Assessment Year 2003-04 was tinkered with by the Commissioner of Income Tax (CIT) in exercise of its powers under Section 263 of the Income Tax Act (hereinafter referred to as the Act?). The CIT was of the opinion that the AO had not done his job properly while making the assessment inasmuch as in respect of certain items, the AO did not bestow any consideration or applied his mind leading to escapement of income. He, thus, restored the matter back to the file of AO for deciding the said issue afresh. This order of the CIT passed under Section 263 of the Act was successfully challenged by the assessee before the Income Tax Appellate Tribunal (the Tribunal? for brevity), which has, by reason of impugned orders dated 26.03.2009, set aside the order of the CIT. It is this impugned order of the Tribunal, which is the subject matter of appeal No.270 of 2010 and has given rise to the following substantial question of law:

(2.) We have accordingly heard the arguments on the aforesaid issue and proceed to decide the same. The issue which is involved in this appeal is limited to the treatment which has been given to the dividend income earned by the assessee in the relevant assessment year. Though it is treated as income from other sources?, the dispute is as to whether the assessee is justified in claiming set off of brought forward losses of previous years against this dividend income giving it the character of business income? even though assessed as income from other sources. The moot question is as to whether the AO while allowing the aforesaid set off had considered this aspect or the CIT was justified in passing the orders under Section 263 of the Act on the premise that the issue was not appropriately dealt with by the AO. Before we deal with the nuances of this issue, it would be necessary to take note of the background under which the issue has cropped up.

(3.) The 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. In the relevant assessment year, it had mentioned dividend income of '44,51,317/- which had been shown as business income. The AO, however, found that in previous years, it was treated as income from other sources, instead of business income. He, thus, accorded the same treatment in this year as well holding it to be income from other sources under Section 56 of the Act. At the same time, while computing the income of the assessee, the AO allowed business losses of the earlier years to be set off against this dividend income as well.